[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
COMPETITION IN THE PACKAGE
DELIVERY INDUSTRY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 9, 2008
__________
Serial No. 110-203
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
ROBERT WEXLER, Florida RIC KELLER, Florida
LINDA T. SANCHEZ, California DARRELL ISSA, California
STEVE COHEN, Tennessee MIKE PENCE, Indiana
HANK JOHNSON, Georgia J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
C O N T E N T S
----------
SEPTEMBER 9, 2008
Page
OPENING STATEMENTS
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee, and Member, Committee on the Judiciary..... 1
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Ranking Member, Committee on the Judiciary. 2
WITNESSES
The Honorable George V. Voinovich, a U.S. Senator from the State
of Ohio
Oral Testimony................................................. 4
Prepared Statement............................................. 5
The Honorable Sherrod Brown, a U.S. Senator from the State of
Ohio
Oral Testimony................................................. 7
Prepared Statement............................................. 9
The Honorable Marcy Kaptur, a Representative in Congress from the
State of Ohio
Oral Testimony................................................. 10
Prepared Statement............................................. 13
The Honorable Michael R. Turner, a Representative in Congress
from the State of Ohio
Oral Testimony................................................. 15
Prepared Statement............................................. 17
The Honorable Betty Sutton, a Representative in Congress from the
State of Ohio
Oral Testimony................................................. 18
Prepared Statement............................................. 20
Mr. David Lee Fisher, Lieutenant Governor, State of Ohio
Oral Testimony................................................. 22
Prepared Statement............................................. 25
The Honorable David L. Raizk, Mayor, Wilmington, OH
Oral Testimony................................................. 32
Submitted Material............................................. 35
Mr. John P. Mullen, CEO, DHL Express
Oral Testimony................................................. 70
Prepared Statement............................................. 73
Mr. Burt Wallace, Senior Vice President of Corporate
Transportation, UPS
Oral Testimony................................................. 87
Prepared Statement............................................. 89
Mr. David Ross, President, Teamsters Local 224, on behalf of the
Pilots of ABX Air
Oral Testimony................................................. 93
Prepared Statement............................................. 95
Mr. John Prater, President, Air Line Pilots Association,
International
Oral Testimony................................................. 98
Prepared Statement............................................. 100
Mr. David A. Balto, Attorney at Law
Oral Testimony................................................. 107
Prepared Statement............................................. 109
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Sheila Jackson Lee, a
Representative in Congress from the State of Texas............. 141
Prepared Statement of the Honorable Barack Obama, a U.S. Senator
from the State of Illinois..................................... 143
COMPETITION IN THE PACKAGE
DELIVERY INDUSTRY
----------
TUESDAY, SEPTEMBER 9, 2008
House of Representatives,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 2:12 p.m., in
room 2141, Rayburn House Office Building, the Honorable Steve
Cohen (acting Chairman of the Committee) presiding.
Present: Representatives Conyers, Delahunt, Cohen, Johnson,
Sutton, Gutierrez, Sherman, Wasserman Schultz, Smith, Coble,
Goodlatte, Chabot, Keller, Issa, Forbes, King, and Jordan.
Staff Present: Perry Apelbaum, Staff Director and Chief
Counsel; Anant Raut, Majority Counsel; Brandon Johns, Majority
Staff Assistant; Sean McLaughlin, Minority Chief of Staff and
General Counsel; and Stewart Jeffries, Minority Counsel.
Mr. Cohen. This hearing of the Judiciary Committee will
come to order.
The proposed agreement between the package delivery
companies, UPS and DHL, whereby UPS would provide DHL with all
air transport for DHL packages, raises a number of concerns.
First, does this proposed agreement violate the Federal
antitrust laws?
I fully expect the witnesses from DHL and UPS will tell us
that there is no need to be concerned because nothing has been
finalized yet. Each has huge teams of lawyers working on the
language of their agreement, but we are worried about it. Any
transaction in which one of the package delivery company's
entire air service is provided by a competitor must be viewed
with a heavy dose of skepticism. It is incumbent upon the
contracting parties to satisfy us that it would not be
anticompetitive. What specific terms are being incorporated
into this agreement to allay our concerns?
Second, what will be the impact on Ohio workers? The City
of Wilmington and the State of Ohio invested a considerable
amount of time and resources in providing DHL with a first-
class sorting facility. Since 2004, the State of Ohio has
offered DHL approximately $400 billion in direct and indirect
financial assistance and incentives, including tax credits and
the construction of a highway bypass. Between the employees of
DHL and its two carrier airlines, ASTAR and ABX, nearly 10,000
jobs across 41 counties are at stake. What is going to happen
to these people if DHL decides to suddenly leave town? What
kind of strain will this put on Ohio social services if 10,000
residents wake up tomorrow without a job?
Third, after this transaction, air transport in the package
delivery industry will essentially be consolidated in the hands
of two players, UPS and FedEx. When competition increases,
consumers win. When competition decreases, consumers absolutely
lose.
Right now, if you need express delivery of a package, you
have four options--FedEx, UPS, DHL or the Postal Service. The
Postal Service already outsources most of its air transport to
FedEx. If DHL outsources its air transport to UPS, what is to
stop UPS and FedEx from raising prices across the board for
express delivery packages? Businesses that require high-volume
shipping will be stuck.
New, nationwide package delivery services don't just appear
overnight. And these costs will inevitably get passed along to
consumers who in these times don't have a lot of extra cash
lying around. With those remarks, which are also the remarks of
Chairman Conyers, who, I notice, is here and who notices that I
am here, I give proper accord to his positions.
And now I'd like to recognize the Ranking minority Member,
Lamar Smith, for an opening statement.
Mr. Smith. Mr. Chairman, thank you for calling this hearing
today regarding the proposed deal between DHL and UPS for air
transport. This is a second hearing in 2 months, the first
being the agreement between Google and Yahoo about a nonmerger-
related agreement between competitors; and I appreciate your
willingness to assert the Committee's jurisdiction in these
matters.
On May 28, 2008, DHL, which is a unit of Deutsche Post
WorldNet, announced a restructuring of its U.S. express
business. Deutsche Post, which had a minority ownership stake
in DHL dating back to the late 1990's, reached 100 percent
ownership in the company in 2002. Late that same year, DHL
acquired its competitor, Airborne Express. Because a
restriction was on the foreign ownership of U.S. airlines,
DHL's air carriers, ABX, the former Airborne Express, and
ASTAR, the former DHL, were created as separate companies with
whom DHL had a contractual arrangement. The two airlines flew
out of Wilmington, Ohio, a town of about 12,000 in southwest
Ohio.
In the last couple of years, DHL's North American business
and, in particular, its air transport business has suffered
large losses, even though the parent company's worldwide
profits were quite large. The reorganization announced in May
2008 involves DHL's outsourcing its entire airfreight business
to its rival, UPS.
A DHL customer will still interact with a DHL driver at
pickup. However, instead of going to Wilmington, Ohio, the DHL
vans will now head to Louisville, Kentucky, where UPS operates
its air hub. A UPS plane will then transport the package to its
destination city, where a DHL van will deliver the package.
DHL estimates that this new arrangement will save the
company as much as $1 billion annually. It will, however,
result in the layoffs of almost 7,000 employees in Wilmington,
Ohio. Conversely, UPS will receive as much as $1 billion in new
revenue and will increase its presence in the Louisville area
to compensate for the increased demand on its airline.
Other carriers, such as FedEx and the U.S. Postal Service,
have agreements that allow for the transport of some packages
on a competitor's planes. However, this will likely be the
first time that a major shipping company has outsourced its
entire airfreight capacity to a rival.
As of today's hearing, UPS and DHL have not reached a
formal agreement. Because this is not a merger, the companies
are not required to receive approval of the arrangement from
the Department of Justice or Federal Trade Commission. However,
it is my understanding the companies will provide the agreement
to the Department of Justice once the contract is finalized.
Unlike Google and Yahoo, it is my understanding that the
parties will not delay implementation of the agreement until
after DOJ has completed its review. Like Google and Yahoo, the
question of whether this agreement harms competition will turn
in large measure on the terms of the contract. Under that
contract, will UPS have an incentive to discriminate against
DHL's packages when it prioritizes items for delivery? Will UPS
gain access to sensitive pricing or customer information that
will give it an advantage over DHL?
The Department of Justice will also have to consider the
likely fate of DHL as a stand-alone competitor in the United
States absent this deal; that is, if this deal is all that
prevents DHL from going out of business, then it may be worth
allowing this deal to go through so as to preserve a strong
third competitor against UPS and FedEx.
These are complicated factual questions and are
unanswerable at this point because the parties have not
finalized any agreements.
I am aware that this deal has been very controversial in
Ohio and for good reason. The loss of 7,000 jobs would severely
impact the town of Wilmington located in Congressman Michael
Turner's district. To that end, I am happy that we will be
hearing from so many distinguished members from the Ohio
delegation today. And both Presidential candidates have
discussed the issue on the campaign trail as well.
While the political ramifications of this agreement cannot
be ignored, I hope this Committee will focus on the subject of
its jurisdiction, namely the possible impact on consumers of
such a transaction.
Mr. Chairman, I look forward to the hearing and hearing
from our witnesses and thank you again for calling it on this
subject.
Mr. Conyers. [Presiding.] Thank you, Mr. Smith.
I am so delighted we have one, two, three, four, five
Members of the Senate and the House here. And I notice Betty
Sutton, our distinguished Member of the Committee, is with us.
In addition, there is Michael Turner himself and, of course, my
dear friend Marcy Kaptur, whose district is only 54 miles from
ours. So she is in the Detroit Labor Day parade as much as I
am. And, of course, Sherrod Brown, who has served us in the
House for so many years before he was elevated to the Senate.
And we begin with the senior Senator from Ohio, the
Honorable George Voinovich. Since 1999, he has served in the
United States Senate with great distinction. And we are
delighted you are all here. All your statements will be
included in the record.
And might I invite the senior Senator to begin our
discussion this afternoon. Welcome to the Judiciary Committee,
sir.
Mr. Voinovich. Thank you, Mr. Chairman.
Mr. Conyers. Press your button. We are high tech here. You
have got to press the right buttons.
All right, we are low tech here. Where are the engineers?
This is so embarrassing. Our visitors come from the other body
and what do we do? I assure you this was an accident, ladies
and gentlemen.
TESTIMONY OF THE HONORABLE GEORGE V. VOINOVICH,
A U.S. SENATOR FROM THE STATE OF OHIO
Mr. Voinovich. Mr. Chairman, thanks for this opportunity,
sir, for having this hearing. It will examine competition in
the package delivery industry--here we go--including the
competitive impacts of the proposed agreement between DHL
Express U.S., its parent Deutsche Post WorldNet--collectively,
DHL--and the United Parcel Service, Inc.
I am pleased that the Committee will spend time reviewing
the competitive situation in this industry. I believe
activities like this hearing, as well as what I anticipate will
be a review of the proposed DHL-U.S.A. agreement by the
Department of Justice Antitrust Division, will reveal why a
DHL-UPS agreement is likely to result in consumer harm and an
unnecessary loss of jobs and an uprooting in the lives of
thousands of families in Ohio.
There is a saying that trying times bring out the best in
people, and that has certainly been the case with the DHL
situation. I have been very proud of the way Ohio's political
leaders have worked together to bring attention to the DHL
situation, which is evidenced by the presence of Senator Brown,
Senator Turner--Congressmen Turner, Sutton and Kaptur. And our
lieutenant governor is here today.
Each of us recognizes the devastating impact that the loss
of 7,000 jobs will have on the Wilmington community. Families
will struggle to pay their mortgages, save for their children's
education and ensure their retirements. In news reports, DHL
and UPS characterize their agreement as nothing more than a
consumer-vendor agreement that raises no antitrust issues.
The proposed DHL-UPS agreement, however, is not a
theoretical consumer-vendor agreement, nor is it a typical
agreement. This agreement will result in DHL becoming heavily
dependent on one of its closest competitors for a key component
of its service, the airlift that moves overnight letters and
packages around the country, and will result in DHL's sharing
critical and competitively sensitive information with UPS when
UPS handles DHL's packages.
The company has also claimed they have not yet entered into
this agreement; thus, there is no need to worry about the
competitive implications. Unfortunately, if DHL and UPS
complete an agreement, which both companies agree does not
require a review under the Hart-Scott-Rodino Antitrust
Improvements Act, then any government antitrust review would
occur after the agreement went into effect after ABX and ASTAR,
the airlines that currently provide airlift service for DHL,
significantly scale back their operations, shedding workers,
planes and abandoning Wilmington, Ohio, from which they
operate. If this occurs, it would be nearly impossible to
return the market to the situation as it exists today.
I know the Committee is aware that the very purpose of the
Hart-Scott-Rodino Act was to avoid situations where two parties
enter into agreement without adequate review that would
irreversibly harm competition. Because the DHL-UPS agreement
does not require Hart-Scott-Rodino Act notification and review,
there is a significant role for Congress and the Antitrust
Division to act proactively to ensure that competition is
protected.
Whenever there is a concerted effort between or among
competitors, special caution must be taken to ensure that
competition is maintained. Because the DHL and UPS agreement
will require DHL to relinquish cost and quality control over
its business to UPS and allow UPS to gain information about DHL
customers, any DHL-UPS agreement raises significant antitrust
issues under the Sherman Act.
As discussed in the Antitrust Division's and Federal Trade
Commission's antitrust guidelines for collaborations among
competitors, an agreement that limits the independent decision
making or combines control over key assets is prone to result
in situations that reduce the ability or incentive for
competition and may increase the likelihood of an exercise of
market power by facilitating explicit or tacit collusion. A
DHL-UPS agreement will result in DHL's surrendering cost and
quality control to UPS over a significant part of its U.S.
operation, resulting in just the sort of competitive harm DOJ,
FTC, JB guidelines raise. Moreover, if DHL adopts the UPS
package tracking and labeling system, it appears UPS will gain
competitive information about DHL's customers. As a result,
such an agreement should be scrutinized closely by this
Committee and other Committees and the Antitrust Division.
Mr. Chairman, thank you very much for allowing me to
testify today.
[The prepared statement of Mr. Voinovich follows:]
Prepared Statement of the Honorable George V. Voinovich,
a U.S. Senator from the State of Ohio
introduction
Chairman Conyers, Ranking Member Smith, and Committee members, good
afternoon and thank you for this opportunity to testify before you at
this important hearing, which will examine competition in the package
delivery industry, including the competitive impacts of the proposed
agreement between DHL Express U.S., its parent Deutsche Post World Net
(collectively ``DHL''), and United Parcel Service, Inc. (``UPS''). I am
pleased that the Committee will spend time reviewing the competitive
situation in this industry. I believe activities like this hearing, as
well as what I anticipate will be a review of the proposed DHL/UPS
agreement by the Department of Justice Antitrust Division (``Antitrust
Division''), will reveal why the DHL/UPS agreement is likely to result
in consumer harm, an unnecessary loss of jobs, and uprooting the lives
of thousands of families in Ohio.
Before I turn to the specific topic of this hearing, I would like
to say a few words about the efforts of the Ohio delegation relating to
the DHL/UPS situation. There is a saying that trying times bring out
the best in people--and that has certainly been the case with the DHL
situation and the Ohio Congressional delegation's reaction. I have been
very proud of the way Ohio's community and public leaders have come
together to ensure that competition in this industry is maintained and
the Wilmington community is treated fairly. This unity is evidenced by
the presence of Senator Brown, Mr. Turner, Ms. Sutton, Ms. Kaptur,
Lieutenant Governor Fisher, and Wilmington Mayor Raisk at this hearing.
We all recognize the devastating impact that the loss of roughly 8,000
jobs will have on the Wilmington community. Families will struggle to
pay their mortgages, save for their children's education, and ensure
their retirements.
the dhl/ups agreement
When DHL first announced that it intended to partner with UPS, I
met with the head of DHL's North American Operations, John Mullen, and
needless to say, I expressed my disappointment and concern about the
transaction. Ohio and Wilmington made a commitment to DHL, and now DHL
is not willing to work with the Ohio stakeholders to help the company
solve its financial issues. Instead, DHL will try to resolve its
financial issues by completing an agreement with one of its closest
competitors.
In news reports, DHL and UPS characterize their agreement as
nothing more than a customer-vendor supply agreement that raises no
antitrust issues. The companies maintain there is nothing
anticompetitive about such a customer-vendor agreement, and in the
abstract, I would tend to agree. However, the proposed DHL-UPS
agreement is not a theoretical customer-vendor agreement, nor is it a
typical agreement. Rather, this agreement will result in DHL becoming
heavily dependent on one of its closest competitors for a key component
of its service--the airlift that moves overnight letters and packages
around the country. In addition, the agreement will inevitably result
in DHL sharing critical and competitively sensitive information with
UPS when UPS handles DHL's packages.
The companies also claim that they have not yet entered into an
agreement; thus, there is no need to worry about the competitive
implications. Unfortunately, such logic does not hold up under
scrutiny. If DHL and UPS complete an agreement, which both companies
have agreed does not require review under the Hart-Scott-Rodino
Antitrust Improvements Act (``HSR Act''), then any government antitrust
review would occur after the agreement went into effect and after the
likely competitive harm has permanently changed the competitive
landscape. The airlines that currently provide airlift service for DHL,
ABX and ASTAR, will likely scale back quickly, shedding workers,
planes, and abandoning the Wilmington, Ohio facility from which they
operate. If this sort of change occurs and later the Antitrust Division
finds competitive issues with the DHL/UPS agreement, then it would be
nearly impossible to return the market to the situation as it exists
today.
I know this Committee is aware that the very purpose of the HSR Act
was to avoid situations where two parties enter into an agreement that
would irreversibly harm competition. That is, the HSR Act was designed
to avoid situations in which the egg cannot be unscrambled. The HSR
Act, however, does not apply to every agreement that raises antitrust
issues. Nevertheless, there is a significant role for Congress and the
Antitrust Division to ensure that competition and consumers are
protected against the harms that could ensue from agreements, such as
the DHL/UPS agreement, that are not reported under the HSR Act.
any dhl/ups agreement raises competitive issues
Section 1 of the Sherman Antitrust Act (``Sherman Act'') makes
contracts in restraint of trade unlawful. Whenever there is a concerted
activity between or among competitors, special caution must be taken to
ensure competition is maintained. Because the DHL/UPS agreement will
require DHL to relinquish cost and quality control over its business to
UPS and allow UPS to gain information about DHL's customers, any DHL/
UPS agreement raises significant antitrust issues under the Sherman
Act.
As discussed in the Antitrust Division and Federal Trade
Commission's (``FTC'') Antitrust Guidelines for Collaborations Among
Competitors (the ``DOJ/FTC JV Guidelines''), an agreement that limits
the independent decision-making or combines control over key assets is
prone to result in situations that ``reduce the ability or incentive
[for competitors] to compete independently'' and ``may increase the
likelihood of an exercise of market power by facilitating explicit or
tacit collusion.''
A DHL/UPS agreement will likely result in DHL surrendering cost and
quality control to UPS over a significant part of its U.S. operations
resulting in just the sort of competitive harm the DOJ/FTC JV
Guidelines anticipate. Moreover, if DHL adopts UPS's package tracking
and labeling system, it appears UPS will gain competitive information
about DHL's customers. As a result, such an agreement should be
scrutinized closely to ensure that it does not lead to consumer harm in
terms of increased costs or decreased services.
1conclusion
Thank you for allowing me to testify today, and I look forward to
continuing my work with the state of Ohio and my colleagues in the
entire Ohio Congressional delegation. I want to thank this Committee
for its willingness to provide the necessary oversight of the
competitive environment in the package delivery industry.
Mr. Conyers. Thank you for your opening comments, Senator
Voinovich.
We are always glad to see Sherrod Brown, now a Member, as
we say, of the other body, but we still remember him fondly for
his work. Now he is an author and sometimes Members of the
Committee; they wonder if we are--have you written a book
lately, another book lately?
Mr. Brown. No. A couple a while ago, but not----
Mr. Conyers. Well, there are some Members----
Mr. Brown. When I was in the minority in the House, I had a
little more time.
Mr. Conyers. We are happy to have you here. Welcome.
TESTIMONY OF THE HONORABLE SHERROD BROWN,
A U.S. SENATOR FROM THE STATE OF OHIO
Mr. Brown. Thank you, Mr. Chairman.
And Ranking Member Smith, nice to see you. Thank you very
much.
And when I walked in and saw Mr. Cohen sitting in the
chairman's seat, I just thought, 14 years in the House, I never
got to sit there. I come back 2 years later, things have--I
just don't understand that.
But thank you. And special thanks to the whole Committee,
especially the chairman and the Ranking Member, and to all
those in Ohio and around the country that have been so helpful
in this issue.
I cite the work of my colleague, Senator Voinovich. I cite
especially the work of Congressman Turner and what Mayor Raizk
has done in Wilmington. I particularly thank Marcy Kaptur and
Betty Sutton, sitting on the panel, and those Members, Steve
Chabot and Jim Jordan, who have shown interest way beyond the
confines of their districts. This is a southwest Ohio issue,
but it is bigger than that, a State issue, and even bigger than
that, obviously a national issue. I particularly also
appreciate the work that Captain David Ross and the Teamsters
have done; and the governor, Governor Strickland, and
Lieutenant Governor Fisher, and more on that in a minute.
In addition to Ohio's congressional delegation and State
leaders, Senators Herb Kohl and Orrin Hatch, the Chair and
Ranking Member of the Antitrust Subcommittee, have asked the
Justice Department to investigate the proposed transaction.
Senator Voinovich and I are particularly appreciative of that.
This is a national issue, of course, as evidenced by both
Senator McCain and Senator Obama's requesting an antitrust
review and monitoring this situation. The proposed transaction
between DHL Worldwide Express and United Parcel Service would
result in DHL's becoming almost entirely dependent on its main
competitor, UPS, to deliver its packages. It may cause serious
harm to competition in the U.S. Air express package delivery
market.
This DHL-UPS proposal, as we have heard, puts more than
8,000 jobs in Ohio at risk, forcing those Ohioans, their
families, the communities in which they live to endure
unrelenting financial uncertainty. The lack of competitive
pricing will affect consumers all over the country. If the DHL-
UPS deal breaks antitrust rules, we need to know that, we need
to know it quickly. If this deal is actually finalized, DHL
will rely on its competitor for a critical element of its
service, its airlift. That sounds simple enough, but what does
that mean?
Well, it is a lot more than one set of planes or another.
As Mr. Smith's opening statement put out questions that we need
to answer, here are some others. Whose system do you use? Will
there be DHL or UPS bar codes on the package? Will customer and
pricing information be shielded from UPS? What prevents a price
squeeze since UPS has control of DHL's wholesale operations?
When the Christmas rush comes, whose packages will move first
if cargo capacity is strained? And finally, what prevents UPS
from using its control of DHL's airlift to marginalize DHL as a
competitor?
Congress needs to better understand what this proposed deal
would mean for free market competition. DHL will tell you its
been losing a billion dollars a year. That justifies changes to
the company, not to the market in which it functions.
Competitive pricing, consumer choice are the hallmarks of a
functioning market. They must be preserved.
This proposed deal teaches a lesson in corporate
responsibility or the lack thereof. The final result may leave
a mark on how our government regulates foreign investment when
it comes to aviation. I am referring to the U.S.-EU Open Skies
Initiative, which aims to loosen existing restrictions on EU
air carriers operating in our great country. Its proponents
claim that deal will create thousands of U.S. jobs and benefits
our Nation's economy enormously.
Mr. Chairman, we have heard that before. When DHL moved to
Ohio, it promised to boost competition in the air carrier
market. It promised to create thousands of good-paying jobs. It
promised, of course, to benefit Ohio's economy enormously. When
DHL bought Airborne in 2003 and decided to headquarter its
airlift operations in Wilmington, our State, of course,
welcomed the deal. In fact, the city of Wilmington and Mayor
Raizk, Clinton County, and the State of Ohio produced an
incentive package including nearly $80 million in direct tax
benefits for DHL and several infrastructure projects and up to
$400 million in indirect benefits. Sales of yellow and red
paint must have tripled as DHL's logo is everywhere throughout
the region, and DHL's name from the All-Star Game to local
billboards quickly became a source of pride throughout our
State. But now Ohio stands to lose 8,000 jobs directly--
thousands more, as Senator Voinovich said, if you count other
jobs in the community.
I have done roundtables in Wilmington, listened to the
mayor talk about what it means to police and fire, listened to
hospital administrators talk about what it means to their
ability to deliver medical care in this community in Highland
County and Montgomery County and all over the region.
I am particularly disturbed by DHL's unwillingness to fully
review alternative proposals that would prevent so many jobs
from being eliminated. That justifies changes--again, DHL says
it is losing a billion dollars in the U.S. market. That
justifies changes to the structure, and Governor Strickland and
Lieutenant Governor Fisher and our delegation have shown
willingness to adapt. We simply ask the company to give a fair
opportunity to other proposals, including from ABX Air.
We have been willing to discuss creative solutions. We have
been met with silence.
Mr. Chairman, the story does not have to end this way. I
ask Mr. Mullen and Mr. Appel of Deutsche Post in Germany to
negotiate in good faith an alternative structure that keeps as
many jobs as possible in my State. It would take genuine
courage for DHL to reconsider its plan with UPS and figure out
a solution that works for the community as well as the company
and its customers. Workers in Wilmington and throughout Ohio
would applaud that courage.
Thank you for the opportunity to share my views.
[The prepared statement of Mr. Brown follows:]
Prepared Statement of the Honorable Sherrod Brown,
a U.S. Senator from the State of Ohio
Thank you, Chairman Conyers and Ranking Member Smith. I'd like to
also acknowledge Mayor David Raizk of Wilmington who will testify
today. Thank you for your leadership in handling this enormous issue.
Before I begin, I'd like to say a word about the efforts and
coordination between local, county, state and federal officials. From
the city council to the White House, our public officials have
recognized the substantive and financial risks posed by this deal. I'm
grateful for the unity in our delegation and the responsiveness from
members of Congress in both chambers.
In addition to Ohio's congressional delegation and state leaders,
Senator Herb Kohl and Senator Orrin Hatch, the Chair and Ranking
Members of the Antitrust Subcommittee, have asked the Justice
Department to investigate the proposed transaction.
Indeed, this is a national issue, as evidenced by both Democrat and
Republican presidential candidates requesting an antitrust review and
monitoring the situation.
The proposed transaction between DHL Worldwide Express and United
Parcel Service (UPS) would result in DHL becoming almost entirely
dependent on its main competitor--UPS--to deliver its packages. It may
cause serious harm to competition in the U.S. air express package
delivery market.
This DHL-UPS proposal puts more than 8,000 jobs in Ohio at risk,
forcing those Ohioans, their families, and the communities in which
they live to endure unrelenting financial uncertainty.
The lack of competitive pricing will affect consumers all around
the country.
If the DHL-UPS deal breaks antitrust rules, we need to know that,
and we need to know it quickly. If this deal is actually finalized, DHL
will rely on its competitor, UPS, for a critical element of its
service--its air lift.
That sounds simple enough, but what does that mean? Well, it's a
lot more than one set of planes or another.
The sorting and tracking functions are highly automated. Whose
system do you use? Will there be DHL or UPS bar codes on the package?
Will customer and pricing information be shielded from UPS? What
prevents a price squeeze since UPS has control of DHL's wholesale
operations? When the Christmas rush comes, whose packages will move
first if cargo capacity is strained?
I'm certainly not an expert on these topics, but what prevents UPS
from using its control of DHL's airlift to marginalize DHL as a
competitor? These are some of the questions that arise and probably
just scratch the surface.
Congress needs to better understand what this proposed deal would
mean for free market competition. In my view, it can only mean trouble.
DHL will tell you it has been losing $1 billion per year. That
justifies changes to the company, not to the market in which it
functions.
Competitive pricing and consumer choice are the hallmarks of a
functioning market. They must be preserved.
The ripple effects of this proposed deal, if it goes forward, would
reach beyond the financial hardship it will create in Ohio. This
proposed deal may teach us a lesson in corporate responsibility, or the
lack thereof. The final result may leave a mark on how our government
regulates foreign investment when it comes to aviation.
I'm referring to the U.S.-EU Open Skies Initiative, which aims to
loosen existing restrictions on EU air carriers operating in our
country. Its proponents claim that deal will create thousands of U.S.
jobs, and benefit our nation's economy enormously.
Ohioans have heard this before, just five years ago. When DHL moved
to Ohio, it was going to boost competition in the air carrier market,
create thousands of good paying jobs, and benefit Ohio's economy
enormously.
When DHL Express bought Airborne Express in 2003 and decided to
headquarter its airlift operations in Wilmington, our state welcomed
the deal. In fact, the City of Wilmington, Clinton County, and state of
Ohio produced an incentive package including nearly $80 million in tax
benefits for DHL and several infrastructure projects. Sales of yellow
and red paint must have tripled as DHL's logo was everywhere throughout
the region, and DHL's name quickly became a source of pride throughout
our state.
Despite millions in financial incentives to DHL, the company has
not gained market share. When DHL purchased Airborne Express in 2003,
it had 18 percent market share. By 2007, DHL's market share dwindled to
about 7 percent. Now, Ohio stands to lose 8,000 jobs directly--and
thousands more if you count other jobs in the community.
I am particularly disturbed by DHL's unwillingness to fully review
alternative proposals that would prevent so many Ohio jobs from being
eliminated.
Again, DHL says it is losing $1 billion in the U.S. market. That
justifies changes to the structure, and Governor Strickland, Lt.
Governor Fisher and the Ohio congressional delegation have shown
willingness to adapt. We have asked the company to give a fair
opportunity to other proposals, including from ABX Air. We have been
willing to discuss creative solutions. We have been met with silence.
The story does not have to end this way. I just ask Mr. Mullen, and
Mr. Appel of Deutsche Post, to negotiate in good faith an alternative
structure that keeps as many jobs as possible in Ohio.
It would take genuine courage for DHL to reconsider its plan with
UPS, and figure out a solution that works for the community, as well as
the company and its customers. Workers in Wilmington and throughout
Ohio would honor that courage.
Thank you for the opportunity to share my views and for the
Committee's commitment to examining this proposal. I look forward to
continuing to work with the city of Wilmington, the state of Ohio and
federal officials in fighting for these jobs.
Mr. Conyers. Thank you, Senator Brown.
Congresswoman Marcy Kaptur has worked with this Committee
and with its chairman across the years. We are neighbors,
nearly contiguous districts, even in different States. And she
has helped me become an infrequent visitor and lecturer at the
Toledo School of Law.
And we are happy to have you here again today.
TESTIMONY OF THE HONORABLE MARCY KAPTUR,
A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO
Ms. Kaptur. Thank you, Mr. Chairman, so very much for the
opportunity to appear here with our colleagues.
And I want to thank you personally for your leadership to
bring us together today with your Ranking Member, Mr. Smith,
and Members of the full Committee; and also to say up front
that we appreciate all the attention that you are giving to
this devastating proposal that DHL, a German government-owned
corporation and its competitor, UPS, are pursuing.
I want to thank our colleagues from Ohio, Congressmen
Turner and Sutton, as well as Senators Brown and Voinovich and
our lieutenant governor, Lee Fisher, who is with us today, as
well as the mayor of Wilmington, David Raizk, who I know is in
the audience and will likely be testifying as well. It is
important that we shine light for the country on this issue and
its expected harm to our economy, our State, and our country.
The question for the Committee is, should the United States
allow this de facto merger between DHL and UPS to go forward
without scrutiny? More good Ohio jobs are likely to be lost,
communities washed out, and consumers across our country, as
well as world customers, subjected to higher prices because of
reduced competition.
This deal is being constructed as an attempt to escape
regulatory oversight, to expedite the consolidation of an
already heavily consolidated industry.
Let me just place on the record: This is a package delivery
industry that has been making money. In 2007, overall, 32.8
billion--that is with a ``b''--billion dollars was taken in in
annual revenues. Now, FedEx got about 42.7 percent of that,
$14.02 billion. $14.02 billion is about as much as we spend in
an annual year to fund NASA. The United Parcel Service earned
10.6 billion; they had about a 32 percent share of the market.
DHL, 2.8 billion in revenues, about 8.5 percent, so they
weren't one of the two big players, but they weren't
insignificant with--2 billion is a lot more than most small
businesses in my district make. And the Postal Service had 950
million, small kid on the block, with about 2.9 percent of the
package delivery business. And then other competitors held
about $4.45 billion. So we are talking about big fish in the
ocean here.
In Ohio, I might just say--I am sure you already know it--
we have lost hundreds of thousands of good-paying jobs with
benefits, certainly since the implementation of lopsided trade
agreements like NAFTA. But the UPS-DHL proposal is merely one
more corporate dispossession of workers in communities that are
the backbone of our economy.
If this arrangement goes through, it is estimated at least
8,000 Ohio jobs are on the short list for elimination and tens
of thousands of supporting jobs in Wilmington, Ohio, and
surrounding counties.
Wilmington itself is a town of 13,000 people. It may not
survive the fatal blow of an abandoned facility that displaces
such a vast workforce. Indeed, as we examine the recent history
of UPS and DHL, we see that job losses and abandoned facilities
are likely. When UPS acquired Emery Worldwide in 2004,
operating at the Dayton airport, UPS left the facility vacant
with 1,200 people unemployed without wages or health insurance.
That is a huge job loss by anybody's calculation. And then when
DHL acquired Airborne Express, DHL left the Cincinnati airport
with unused facilities. I know that Congressman Chabot knows
that story well.
If these two package giants merge air operations, we can
expect that the Wilmington facility will suffer a similar fate,
despite the hundreds of millions of dollars of taxpayer money
that DHL asked the State of Ohio to invest in infrastructure to
support its operations. Not only will the people of
southwestern Ohio be hit hard, but also so will consumers
nationwide and likely worldwide.
Eliminating DHL from the express overnight shipping market
will leave just two companies, UPS and FedEx. This further
reduces competition with likely higher prices for you, for me,
and for everyone. Furthermore, the possibility that this
alliance will extend to Asian and European operations is merely
a step ahead.
I urge your Committee to investigate this proposal both in
terms of its antitrust implications, but also the impact that
it will have on Wilmington and the State of Ohio as a whole.
It is no secret that Senator Obama has visited Wilmington,
as well as Senator McCain. We need to have this on everyone's
radar. If we allow these types of megabusiness arrangements
with little regulation or regard, we can expect other companies
will feel comfortable abandoning communities all in the name of
higher corporate profits. But at whose expense? When is big too
big? And when does big become anticompetitive?
Since national corporations cannot be allowed to forgo
their duties to fulfill promises such as those DHL made to the
city of Wilmington and the State of Ohio--they promised to be a
long-term presence and enhance competition, not detract from
it--it appears that we can no longer count on corporations
keeping their word or our ability to ensure a return on our
State's investments.
Congress's most important responsibility is to represent
our people, not just the interests of huge corporations. I am
here to speak on behalf of workers who will be forced out of
jobs and left without health care. I know that Captain David
Ross is here, President of the Teamsters Local 1224 and
representing the pilots of ABX Air. I hope they will be given
an opportunity to testify as well. We speak on behalf of
students and our schools that will be underfunded because of
the potential loss of tax revenue, and communities who will be
harmed by pending facility closures.
In closing, Mr. Chairman and Members, thank you for giving
us the opportunity to bring to you and to the Committee's
attention the plight of our people in communities who will be
abandoned if DHL is allowed to break its commitment to the
State of Ohio and to the people of Wilmington. And most of all,
thank you for meeting the responsibilities of your Committee.
Thank you.
[The prepared statement of Ms. Kaptur follows:]
Prepared Statement of the Honorable Marcy Kaptur,
a Representative in Congress from the State of Ohio
Mr. Conyers. Thanks, Marcy Kaptur.
Now the former mayor of Dayton, Ohio, now serving several
terms in the House of Representatives, the Honorable Michael
Turner, who is a very active Member of this 110th Congress.
Welcome to the House Judiciary Committee.
TESTIMONY OF THE HONORABLE MICHAEL R. TURNER,
A REPRESENTATIVE IN CONGRESS FROM THE STATE OF 0HIO
Mr. Turner. Thank you, Mr. Chairman.
Thank you, Ranking Member Smith.
Mr. Chairman, I thank you for holding this hearing on what
really is an important issue for the U.S. economy. And I thank
the Members of the Committee for their attention and their
scrutiny of this transaction, Senator Brown and Senator
Voinovich, and I thank Congresswoman Kaptur and Sutton for
coming together to support an issue that affects Ohio. This has
been a bipartisan issue in our State, and we greatly appreciate
your reviewing it today, Mr. Chairman.
Wilmington, Ohio, is in my district, the Third District of
Ohio, so I want to speak a moment about the people of the Third
District who will be impacted by this transaction.
This facility is not closing because of them. They are
hardworking, professional, and committed. The facility that is
subject to possible closure was operated prior to DHL's
acquisition without a loss. However, the people will be
impacted, professions will be lost, homes are at risk, dreams
are at risk, the ability to send children to college is at
risk. In a nine-county area around Wilmington, Ohio, people
send family members to this facility in order to obtain health
insurance. Family farms and small businesses that depend on
that health insurance will be impacted. And, of course, the
businesses that serve the people of the community will be
impacted.
Well, today, I wanted to, with the others, outline why this
is bad for the U.S., the U.S. consumer, and why I believe this
is an antitrust violation.
If you go back just 4 years ago and view this as a stepped
transaction, you see a very different picture in the shipping
industry. Four years ago we would have had five major players--
Emery, Airborne, Federal Express, DHL and UPS. UPS acquired
Emery and one disappeared. DHL acquires Airborne and another
disappears. Now DHL and UPS are intending to combine for taking
what were five in the U.S. market down to two.
But we shouldn't just stop there. We should also look at
what is going on in the European industry right now. The
Atlanta Journal Constitution just reported that UPS is in
negotiations to acquire the number two carrier in Europe. They
report that there are three major carriers in Europe--UPS, TNT
and DHL. Well, if UPS acquires TNT, the number two, they will
be down to two. But in reality they will be down to one because
we already know that between DHL and UPS, there will be this
strategic alliance. So there really will be one where there
were three. So if you go to Europe to send a package to the
United States, whether you go into a DHL or UPS office, you
will be dealing with, in effect, one company.
Now, what else is bad for the U.S. besides the impact of
the consolidation? We will be dismantling important
infrastructure for the operation of our economy. When these
industries grew, they grew slowly in scope. Today, though, in
order to be able to compete in the package systems industry,
you have to have a nationwide system. That will be dismantled
and will become a barrier to entry for others. So we will have
consolidation and we will also have preventing further
competition.
Once they have market control, what will happen? Well, they
can limit the service and control pricing.
What are some of the things that we know? Well, I met with
DHL officials in my office, and these are some of the things
that we do know. Their computer systems will be integrated
because the two companies will have to talk to one another.
Their costs will have to be coordinated because UPS will be
charging DHL. And we also know, because they reported this to
me in my office, that this may expand--the strategic alliance
may expand to European and Asian markets. So it is not merely
just a strategic alliance between UPS and DHL here.
Now, what do we need to know? We need to know why would UPS
and DHL agree to do this and how did DHL take Airborne, a prior
business that was profitable, and generate losses? What is the
future relationship between DHL? Is this just the start? And
what does this mean for the almost 10,000 people in southwest
Ohio that will have lost their jobs as a result of these
consolidations with DHL and UPS?
Now, usually, for me, if something doesn't make sense, I
assume something else is going on. And in this instance, I
think something else is going on and that we do have here a de
facto merger. Why would DHL hand its clients to UPS? Why would
DHL cost structure--agree to a cost structure that would become
higher than UPS, since they are basically going to become UPS-
plus?
DHL is going to share its information with UPS. Why
wouldn't UPS steal DHL's clients and why wouldn't that concern
them? Why would anyone choose DHL when everyone will know that
they are a front office for UPS and they can go direct?
Why wouldn't DHL seek cost cutting without abandoning their
independent U.S. presence instead? And why is there no deal for
us to scrutinize when they have been in negotiations and
discussions for months? Why would DHL have exclusive
negotiating rights with UPS and not agreed to negotiate with
their own carriers, ASTAR and ABX? For me, if it doesn't sound
right, it probably isn't right.
I would like to end with the last paragraph that I put in
an op ed piece for the Cincinnati Enquirer. I think it sums up
the issues that we have here. All of this should be
unnecessary. If DHL lived up to its promises to Ohio and to the
town of Wilmington, we all would be focusing on how to make DHL
more successful.
Wilmington's past support for DHL should count for
something. The surrounding community accepted DHL's vision of a
global company operating in their backyards and understands
that DHL must curtail its losses. However, usually when a
company is losing money, they fire someone, they don't fire a
whole town.
Well, I guess now we know that there is a difference with
DHL. Maybe the letters for DHL stand for ``Do Harm and Leave.''
[The prepared statement of Mr. Turner follows:]
Prepared Statement of the Honorable Michael R. Turner,
a Representative in Congress from the State of Ohio
Thank you Chairman Conyers, Ranking Member Smith and the other
members of the Judiciary Committee for holding this important hearing
today on the proposed DHL/UPS transaction that would shift DHL's air
shipping from ABX and AStar to an exclusive contract with UPS.
I also want to thank my Ohio colleagues for their work on this
important issue. Our delegation has truly worked together on a
bipartisan basis to achieve the best possible outcome for Ohio, its
workers and their families.
Mr. Chairman, from what we currently know of this proposal, DHL
intends on ending their inter-US air shipping contracts with ABX and
AStar, and contract exclusively with UPS. The result of this
transaction would be the closure of the Wilmington Airpark, owned by
DHL, as DHL's operations would presumably consolidate to a UPS
facility. Additionally, as DHL is the largest customer of ABX and
AStar, it is reported that this transaction will likely result in the
drastic downsizing, if not full closure of these two domestic carriers.
The total direct impact of the current proposed transaction will amount
to over 8000 jobs in Ohio, most of which are in Clinton and Highland
Counties.
The losses go beyond the direct impact of jobs. From schools, to
churches, to non-profits, to small businesses, I would venture to say
that there will not be a single entity in Wilmington that will not be
detrimentally impacted by DHL's abandonment.
Mr. Chairman, unfortunately, since the announcement of the
transaction, very few details have been released. Our community and its
workers deserve answers. My community wants assurances that this
transaction complies with federal law. That is what we hope to achieve
here today.
Mr. Chairman, unfortunately, this is not the first time in recent
history when UPS has negatively impacted my community of southwest
Ohio. The transaction between UPS and DHL, which this committee will
examine today, should be viewed in the context of UPS's recent history
of consolidations in southern Ohio.
Prior to 2001, Emery Worldwide had been operating a successful air
shipping business out of Dayton, Ohio. Emery was succeeded by Menlo
Worldwide Forwarding, a global shipping company. Menlo operated their
business out of the Dayton International Airport with gross revenues
reported at $1.9 Billion in 2003. In 2004, UPS acquired Menlo and
consolidated their operations to Louisville, Kentucky. This eliminated
over 1500 Dayton-based jobs.
Similarly, until 2003, Airborne Express had been a leading domestic
shipping company, operating out of Wilmington, Ohio. It was reported
that at that time, Airborne maintained 19% of the overnight shipping
market in the US. DHL operated a facility at the Cincinnati Airport.
DHL acquired Airborne and subsequently consolidated their Cincinnati
operations into the Wilmington, Ohio facility.
Mr. Chairman, I and the leaders of the Wilmington community were
assured that the outcome would be favorable for the community and that
no jobs would be lost. As a result, our federal, state and local
leaders rallied to make DHL a success. DHL owns a state-of-the-art
airpark and sorting facility in Wilmington. The State of Ohio, as well
as local city and county governments, pledged nearly $450 Million
dollars in investments toward ensuring DHL's success.
Now, UPS will become the benefactor of DHL's airlift operations;
once again, consolidating the air cargo market, causing the demise of
two additional domestic shipping companies (ABX and AStar), and causing
the loss of over 8000 Ohio jobs.
If this transaction is allowed to proceed, the overall effect will
be that UPS will have successfully consolidated over 10 thousand jobs
from Ohio, and caused the closure of four domestic air cargo companies
(Emery/Airborne/ABX/AStar).
This consolidation of the market will surely have a detrimental
impact on American consumers. In fact, this transaction has the
potential to affect international shipping, further consolidating
markets, and consumer choice. The Atlanta Journal Constitution reported
on August 22nd that UPS is rumored to be acquiring TNT, a European
express shipping company. Reports indicate that this acquisition will
add 15% market share to UPS's European express shipping business and
will make them the number one express shipper in Europe.
These consolidations are just the beginning. In a meeting with DHL
officials, I asked if they believed that the DHL/UPS strategic
relationship would expand to include their European and Asian markets,
and they indicated that it could.
Further, UPS and DHL report that they will continue to compete
against each other. However, they intend to fully integrate their
computer systems, customer lists, and transportation infrastructures.
Dealing with DHL will really be dealing with UPS. They will cease to
operate as separate companies. This transaction should be viewed as if
a merger between them was to occur.
If these transactions go forward, the US market with contract from
what has been five major players--FedEx, UPS, DHL, Airborne, and
Emery--to two players. FedEx and a combined DHL/UPS will be left. In
Europe, the three major carriers will in effect become one, with a
possible UPS/TNT acquisition and a strategic alliance between UPS and
DHL.
Today the committee has the opportunity to shed much needed light
on this proposal and to get answers to the questions which Wilmington
and Ohioans are seeking.
Mr. Chairman, my community has brought forward a list of questions
that I have provided to the Committee's membership. These are questions
that employees, their families and friends have submitted to my office,
and I encourage the Committee's membership to consider these inquiries
when they have the opportunity to question today's panels.
Mr. Chairman, I'm sure you will hear today from UPS and DHL, and
they will tell you that this transaction does not raise anti-trust
issues. But when you consider the context of this transaction--that the
proposed UPS/DHL transaction is the next phase in a stepped transaction
which will result in the loss of four domestic carriers, it is obvious
that American consumers will lose meaningful choice when they ship a
package.
Mr. Chairman, I would like to close by reiterating what I said in
an Op-Ed for the Cincinnati Enquirer. I would like to submit that Op-Ed
for the record. In that piece, I said: ``. . . all of this should be
unnecessary. If DHL lived up to its promises to Ohio and to the town of
Wilmington, we could all be focusing on how to make DHL more
successful. Wilmington's past support for DHL should count for
something. The surrounding community accepted DHL's vision of a global
company operating in their backyards and understands that DHL must
curtail its losses. However, usually when a company is losing money,
they fire someone, not a whole town.''
We now know that the letters ``DHL'' stand for ``Do Harm and
Leave''.
Mr. Conyers. Thank you so much.
I notice Attorney Betty Sutton, a Judiciary Committee
Member from Ohio, who works with me closely on matters of
antitrust, but none of the Senators or Members of Congress here
have used the term ``outsourcing agreement,'' and that is
perhaps an oversight or maybe--I don't know what it is. Would
you share some light on that area of this hearing with us,
Attorney Betty Sutton?
TESTIMONY OF THE HONORABLE BETTY SUTTON,
A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO
Ms. Sutton. Thank you, Mr. Chairman. I do believe that that
word is in my testimony.
Mr. Chairman, thank you so much for holding this hearing on
this very important issue. And thank you to all the Members who
are here today to hear about this, that is so crucial to
working families in Ohio. I want to thank my colleagues both
from the Senate and the House for coming forward; and we stand
in solidarity to make our points.
As an Ohioan, I sincerely appreciate your efforts, Mr.
Chairman, to closely examine this agreement between DHL and
UPS. And I hope that the efforts here today will bring to light
the very negative implications of this proposed agreement. This
hearing is an important step in protecting American consumers
and fighting for American jobs, and I commend your leadership
on both.
This business contract affects not only the 8- to 10,000
jobs that are at risk in Ohio, but every American who receives
and sends packages. And that is why today I would like to talk
about the U.S. domestic air carrier market. Currently, the air
carrier market, as has been noted, is dominated by three
express carriers--FedEx, DHL and UPS. Any person in this
country can use one of these providers to have packages shipped
throughout the country for door-to-door delivery. However,
there are recent developments that affect these top competitors
in the air carrier markets.
In May, Deutsche Post WorldNet, the parent company of DHL,
announced that it was restructuring all of its North American
operations. As part of this restructuring, DHL announced it
would enter into a long-term contract with UPS in which UPS
would provide air carrier services for DHL within North
America. So that means that if a DHL customer sent a package
that required air transportation, UPS would sort and deliver
the package instead of DHL. In a sense, DHL is outsourcing its
air carrier operations to UPS.
The contract between DHL and UPS is not a formal merger;
however, given the close relationship between the two
industries, it is a de facto merger. If UPS executes all of
DHL's air carrier operations, it will require the sharing of
sensitive information such as tracking numbers, customer
information and pricing. And I believe it is safe to say that
the sharing of this sensitive information puts the companies at
risk of remaining independent competitors.
It is common sense. When a business agreement results in
shared information that decreases competition, that raises
serious concerns under section 1 of the Sherman Act.
Besides these very legitimate concerns, this business
agreement, as has been stated here, would substantially
diminish the competitive nature of the air carrier industry. If
UPS and DHL are allowed to enter into this contract, then the
domestic air carrier industry would only be comprised of FedEx
and UPS. According to a report from the Air Cargo Management
Group, without DHL as an independent competitor, UPS and FedEx
would make up 96 percent of the domestic air delivery market.
This raises a series of concerns.
First, with only two large competitors in the industry, it
will make it difficult for smaller businesses to enter into the
market. Second, there is less incentive to compete on price,
which would negatively affect consumers. And lastly, since this
agreement would lessen competition, it raises a potential
violation of section 7 of the Clayton Act. The bottom line, Mr.
Chairman, is that this agreement between DHL and UPS raises
serious questions under the antitrust law and deserves careful
examination.
What is perhaps the most concerning aspect of the issue,
beyond the potential violation of the antitrust law, is the
incredibly harmful effect this agreement will have on Ohio
workers and families; and that can't be overlooked. There are
8,000 Ohio workers at risk of losing their jobs. This means
more families without health insurance, more families
struggling to put food on the table, and more families
struggling to keep a roof over their heads.
Mr. Chairman, Ohio's working families are already suffering
from the impact of harmful trade and economic policies that
have caused much damage and that this Congress is working hard
to reverse. According to the Ohio Department of Jobs and Family
Services, in the month of July, the number of workers
unemployed in Ohio was 430,000. Last year alone, Ohio lost
nearly 100,000 jobs, contributing to an unemployment rate of
7.2 percent; and now we face a flawed business agreement that
is threatening more Ohio jobs. I, along with my colleagues,
will continue to fight to make sure our working families have a
voice in this matter and that we look at it very closely.
And what is perhaps even more alarming is that the
potential job loss reaches far beyond Ohio. Deutsche Post
WorldNet's new North American business plan also includes
closing 34 percent of its U.S. operations.
Mr. Chairman and fellow Committee Members, I ask that you
examine this issue with the utmost concern and scrutiny not
only because of its antitrust implications, but because of the
negative impact this agreement would have on our economy and
our working families. With a 6.1 percent unemployment rate
nationally, I do not think that any of our districts in Ohio or
beyond can afford to lose more jobs, especially from a faulty
business agreement.
And I yield back.
[The prepared statement of Ms. Sutton follows:]
Prepared Statement of the Honorable Betty Sutton,
a Representative in Congress from the State of Ohio
Thank you Mr. Chairman for holding this important hearing on an
issue that is so crucial to working families in my home state of Ohio.
As an Ohioan, I sincerely appreciate your efforts to closely
examine this agreement between DHL and UPS and I hope that your efforts
here today will bring to light the very possible negative implications
of this proposed agreement.
This hearing is an important step in protecting American consumers
and fighting for American jobs and I commend your leadership in both.
This business contract affects not only the 8,000 jobs that are at
risk in Ohio, but every American who sends or receives packages.
And that is why today I would like to talk about the U.S. domestic
air carrier market.
Currently, the air carrier market is dominated by three express
carriers: FedEx, DHL and UPS.
Any person in this country can use one of these providers to have
packages shipped throughout the country for timely, door to door
delivery.
However, there are recent developments that affect these top
competitors in the air carrier market.
In May, Deutsche Post World Net, the parent company of DHL,
announced that it was restructuring all of its North American
operations.
As part of this restructuring, DHL announced that it would enter
into a long-term contract with UPS, in which UPS would provide air
carrier services for DHL within North America.
This means that if a DHL customer sent a package that required air
transportation, UPS would sort and deliver the package instead of DHL.
In a sense, DHL is outsourcing its air carrier operations to UPS.
The contract between DHL and UPS is not a formal merger.
However, given the close relationship between the two industries it
is a de facto merger.
If UPS executes all of DHL's air carrier operations, it will
require the sharing of sensitive information such as tracking numbers,
customer information, and pricing.
I believe it is safe to say that the sharing of this sensitive
information puts the companies at risk of remaining independent
competitors.
When a business agreement results in shared information that
decreases competition, this raises serious concerns under Section 1 of
the Sherman Act.
Besides these very legitimate concerns, this business agreement
would substantially diminish the competitive nature of the air carrier
industry.
If UPS and DHL are allowed to enter in this contract, then the
domestic air carrier industry would only be comprised of FedEx and UPS.
According to a report from the Air Cargo Management Group, without
DHL as an independent competitor, UPS and FedEx would make up 96
percent of the domestic air delivery market.
This raises a series of concerns.
First, with only two large competitors in the industry, it will
make it difficult for smaller businesses to enter into the market.
Second, there is less incentive to compete on price, which could
negatively affect consumers.
And lastly, since this agreement would substantially lessen
competition, it raises a potential violation of Section 7 of the
Clayton Act.
The bottom line, Mr. Chairman, is that this agreement between DHL
and UPS raises serious questions under Anti-Trust law and deserves
careful examination.
What is perhaps the most concerning aspect of this issue beyond the
potential violation of Anti-Trust law, is the incredibly harmful effect
this agreement will have on Ohio workers and families.
There are 8,000 Ohio workers at risk of losing their jobs.
This means more families without health insurance, more families
struggling to put food on the table and more families struggling to
keep a roof over their heads.
Mr. Chairman, Ohio's working families are already suffering from
the impact of harmful trade and economic policies that have caused much
damage, and that this Congress is working hard to reverse.
According to the Ohio Department of Jobs and Family Services, in
the month of July, the number of workers unemployed in Ohio was
430,000.
Last year alone, Ohio lost nearly 100,000 jobs contributing to an
unemployment rate of 7.2 percent.
Now, we face a flawed business agreement that is threatening more
Ohio jobs, and I will continue to fight, along with my colleagues, to
make sure our working families have a voice in this matter.
And what is perhaps even more alarming, is that the potential job
loss reaches far beyond Ohio.
Deutsche Post World Net's new North American business plan also
includes closing 34 percent of its U.S. operations.
Mr. Chairman and fellow members of the Committee, I ask that you
examine this issue with the utmost concern and scrutiny.
Not only because of its Anti-Trust implications, but because of the
negative impact this agreement could have on our economy and our
working families.
With a 6.1 percent unemployment rate nationally, I do not think
that any of our districts can afford to loose more jobs, especially
from a faulty business agreement.
Thank you, Mr. Chairman and I yield back.
Mr. Conyers. Thank you.
There is a sense of urgency here. This could go into
effect, like tomorrow; am I not correct? And further, this
could reach, not just throughout Ohio, but it could reach
Michigan and beyond; am I not correct?
And so as I thank the Senators for their appearance here
today and close down our first panel.
I would like to caution our Members of the Committee to
realize that there must be another side to this story here.
With all due respect to the distinguished group of colleagues
that are before the Judiciary Committee, there must be some
other position not yet revealed to the Committee that makes
this something--well, let's say, if we were in court, there
would be a presumption of innocence, wouldn't there be, to
start off with consideration of these matters?
Right now, we have received from the distinguished men and
women that represent the State of Ohio and including another
distinguished Member from Ohio on the Committee, as well as the
one that is before us, there has been one picture here. And so
I look forward to the second panel to hope that there may be
some proportionality or redressing of the issue that makes us
wonder how this could be going on, this so-called agreement of
outsourcing that, in effect, is a merger. And where is our
Antitrust Division of the Department of Justice?
There should be some good reasons forthcoming, and I thank
this panel so much for their time and energy and
resourcefulness. We will expand this recess for the vote that
is pending on the floor. Thank you all very much.
[Recess.]
[3:25 p.m.]
Mr. Conyers. The Committee will come to order. And I thank
the witnesses and our guests here today for their patience and
cooperation.
We are so delighted that we are joined by Mr. David Balto,
Captain Prater, Captain Ross, President Burt Wallace, CEO John
Mullen, Mayor David Raizk. And, of course, we are honored to
have the Lieutenant Governor of the State of Ohio, Lee Fisher,
who has a long and distinguished career in Ohio politics. He
has been not only a State representative but a State senator
for quite a period of time and has a distinguished resume. He
has also been Attorney General of the State of Ohio and was
elected Lieutenant Governor in 2006.
Now, it is true that in panel one the testimony seemed to
stack up all one way. We are hoping that with this panel there
may be a development of some kind of balance that didn't seem
to exist previously.
But all your statements will be included into the record.
And we will now begin. And we welcome as our first witness
Lieutenant Governor Lee Fisher.
TESTIMONY OF DAVID LEE FISHER, LIEUTENANT GOVERNOR, STATE OF
OHIO
Mr. Fisher. Mr. Chairman, thanks very much for giving me
and my colleagues today the opportunity to testify.
Although I have no doubt that you will hear some balance
today, you are not going to hear it from me, because I share
the views of all the members of the prior panel. And, in fact,
Governor Strickland and I have worked very closely with Senator
Brown and Senator Voinovich and Congressman Turner, Congressman
Sutton, and, for that matter, every single Member of the House
congressional delegation, including Congressman Jordan, who is
here today as a member of your panel.
And I want to begin by saying to you that this is not one
of those issues that has a partisan divide. This is an issue
that both Presidential candidates have focused in on because it
is an American issue dealing with jobs.
I have the responsibility in Ohio, Mr. Chairman, of serving
not only as Lieutenant Governor but also as the director of the
Ohio Department of Economic Development. So I am here today
wearing both hats. And as you were nice to mention, I also, in
a prior position, served as the Attorney General of Ohio. And
during that time, I was the Chair of the National Association
of Attorneys General Antitrust Committee. So I don't pretend to
be as expert as some of members of this or other panels on
antitrust law, but I do have some familiarity. And where
antitrust laws intersect with economic development I suspect
that I do have some experience, given the job that I hold
today.
And in the time that I have been in public office in Ohio
over the last 28 years, I have never seen a potential
dislocation that will, if it goes forward, have the magnitude
that it will have in southwest Ohio. That is why Governor
Strickland and I wake up every single morning and make this
particular matter our single highest priority.
The Wilmington Air Park is the largest privately owned
airport in the United States of America. This is no small part
of real estate. It is a piece of real estate that actually has
tremendous potential. And to the credit of DHL, they recognized
that early on when they first made their decision to locate
there.
ABX, a contractor with DHL, employs approximately 6,000
women and men; ASTAR, another contractor, employs approximately
1,200; and DHL itself employs 1,000. But that only begins to
touch the surface. As Congressman Chabot knows, who just walked
in, there are some 2,000 employees throughout southwest Ohio in
41 affected counties, including the congressional districts of
many members of our Ohio delegation, that will be either
directly or indirectly affected by this decision.
I want to recognize that because I deal with economic
development every day. Neither Governor Strickland nor I are
naive or ignorant of the changes that are going on in the
global delivery market and, particularly, the pressures that
are on those companies that are unusually oil-dependent. And
until we all do a better job of reducing our dependence on
foreign oil, whether it is our domestic automakers or whether
it is DHL, they are going to have some challenges.
But what has been disappointing, at least so far, in this
situation is that we have not been given the opportunity, as
the seventh-largest State in the country, to be able to sit
down with DHL and try to address their financial challenges.
While we might have some disagreement about the extent of
those challenges, we might even have some disagreement about
why they have their challenges, we don't have disagreement that
they have them. Where we have disagreement is about how to
solve them. We think that their proposed transaction with UPS
is a solution that is unwise, unfair and unnecessary.
We have indicated, Mr. Chairman, on repeated occasions that
we are prepared to meet with Deutsche Post and DHL anywhere,
anytime, in the world to work with them as their risk-sharing
collaborative partner, as we do with companies around the world
every day, to try to address their financial challenges, to
reduce their cost of doing business. But we have not been given
that opportunity despite repeated requests since May 28th when
the announcement was made.
You heard today very articulately from my colleagues, both
Senators and Members of Congress, why we believe that this is,
in fact, anticompetitive; and we do. We think this transaction
is one step closer to a full merger between DHL and UPS. As
this deal has been reported, customers will still place their
orders with DHL, the branding would remain the yellow and red,
but UPS would handle the package sorting and the delivery of
those packages. In effect, DHL would be a $1-billion-a-year
customer of UPS.
The question left unanswered--perhaps we will hear it
today--is whether the customers of DHL Express would continue
placing their orders with DHL when their packages are being
sorted and delivered by UPS. Or would DHL Express customers
eliminate the middle man and contract with UPS directly?
Some analysts view the proposed transaction as an
indication that DHL will not continue to compete for market
share. Less competition could mean higher rates for the two
industry giants, UPS and FedEx. Based on past experience with
DHL, we are concerned that the Wilmington Air Park will be
idled once most of DHL Express's domestic shipping and package-
handling work is outsourced to UPS. As has been pointed out in
prior testimony, this would be not the first time that Ohio has
suffered a similar loss, although this will be the largest of
them all.
One of my successors in the Ohio Attorney General's Office,
the current Attorney General, Nancy Rogers, has met with
Governor Strickland and me. And we have discussed that there is
no higher legal priority to us than taking a look as to whether
or not Ohio's antitrust statute, the Valentine Act, applies to
this particular transaction.
I am pleased to say that the antitrust section of the Ohio
Attorney General's Office has retained and is working closely
with a nationally respected economist experienced in issues of
competition in the transportation industry. And the Attorney
General's Office has sought out, obtained and analyzed
extensive data, conducted numerous interviews, and is engaged
in statutorily authorized information-gathering at this point.
As you know, our United States Attorney General has also
been asked to look at this by the entire congressional
delegation. On July 10th, I traveled to Washington, DC, to meet
with James O'Connell of the Antitrust Division and Julie Warren
in the Intergovernmental Office. We talked about why it was
Governor Strickland's and my belief that there were clear
potential violations of the antitrust laws.
We have negotiated in good faith with DHL Express. And we
were pleased to extend financial and other incentives to the
company to locate their operations at Wilmington in 2004.
In April of 2008, representatives of DHL Express, including
their chief legal counsel, who is here today, traveled to
Columbus to discuss a taxation policy that has historically
benefited the company. Unfortunately, during that meeting, when
I directly asked the company representatives about the future
of the DHL site in Wilmington, they did not indicate any plans
to downsize DHL's Express operations in Ohio.
I want to make it clear that I know their chief counsel,
and I am not suggesting in any way that he misled me. It is
quite possible that he himself did not know at the time. But
the point is not so much that we were misled but that we were
not given the chance to sit down with DHL before they made
this, we think, fateful and unwise decision.
During the questions and answers, Mr. Chairman, I would be
more than happy to address my own personal views on the
violation of the Sherman Act, the Clayton Act and Ohio's
Valentine Act, but in the interest of time and because there is
an antitrust expert at the other end of the table, that may not
be necessary. And so I will defer those kinds of questions to
later, if it is all right, Mr. Chairman.
[The prepared statement of Mr. Fisher follows:]
Prepared Statement of David Lee Fisher
Mr. Conyers. Thank you, Lieutenant Governor Fisher, for
getting this second panel off to a very fine start. Your
information and insight and, I would say, considerable
experience in antitrust issues will be very helpful as we sort
our way through this very intriguing and, in some ways,
mysterious problem that confronts the Committee on Judiciary
today.
Mayor David Raizk, a lifelong resident of Wilmington, is
our next witness. He went to school there, he went to college
there, he worked his entire life there. He was the director of
public safety and then 16 years as the president of the
Wilmington City Council. And the last 8 years, he has been its
mayor and begins his third term.
And we welcome you here for your insight on the subject
matter for which we have come.
TESTIMONY OF THE HONORABLE DAVID L. RAIZK, MAYOR, WILMINGTON,
OH
Mr. Raizk. Thank you, Mr. Chairman.
First of all, I want to say thank you to you and to all the
Members of the Committee for giving me the opportunity to
testify here today. I am always honored to represent the
community that I serve, my hometown, Wilmington, Ohio.
Wilmington and Clinton County is a wonderful place to live,
work and raise your family.
I also want to thank Lieutenant Governor Lee Fisher,
Governor Ted Strickland, Senators Brown and Voinovich,
Congressman Mike Turner, Congresswoman Betty Sutton, Mr. Chabot
and all the members of the Ohio delegation for coming to our
aid. We have created one of the perfect scenarios of bipartisan
support in support of those citizens of southwestern Ohio. If
anybody is disaffected with government today, they ought to
look at what is happening in Wilmington, Ohio, and they can
renew their hope in government.
Since May 28th, a storm has descended on Wilmington, Ohio,
and it won't go away. On May 28th, DHL, Wilmington and Clinton
County's largest employer and also the largest employer in the
five surrounding counties, announced that they were seeking a
deal with UPS, their biggest competitor, to handle their
airlift operations in the United States. This effectively would
cease operations at the Wilmington Air Park.
This was especially difficult for me, as I received this
news firsthand in Germany at DHL and Deutsche Post World Net
headquarters. I was in Germany as a guest of DHL, representing
the City of Wilmington and the Wilmington Air Park, the largest
hub in the DHL network, at the grand opening of their new hub
in Leipzig.
While given the economic climate, we knew some
restructuring was in the works and some job loss would be
coming, primarily as a result of the standing down of the DC-9
portion of the business of DHL, ABX and ASTAR. But there was
reason for optimism concerning the Wilmington Air Park.
In February, I hosted a conference call in my office with
Governor Ted Strickland, representatives of ASTAR Air Cargo and
ABX Air, DHL's partners for airlift and sorting operations in
the United States, and representatives of DHL. At that time,
DHL assured the Governor that, although there would be some job
cuts coming, they were committed to the Wilmington Air Park. In
April, as the Lieutenant Governor testified, in discussions
with DHL on possible assistance from the State of Ohio,
Lieutenant Governor Lee Fisher was also assured of DHL's
commitment to the Wilmington Air Park.
So it was with some comfort level that I went to Germany to
represent Wilmington. That comfort was further enhanced when
German Foreign Minister Steinmeyer, the keynote speaker at the
hub opening, mentioned Wilmington, Ohio, in his address.
Imagine my shock 2 days later when I received the news
firsthand that DHL was seeking a deal with UPS. Those of you
who have played football and have had the wind knocked out of
you know exactly how I felt.
What will be the result of this proposed transaction? What
will be the impact?
The job loss alone, which includes DHL, ABX Air, ASTAR Air
Cargo, and 18 companies we have identified located in and
around the air park with direct or indirect relationships with
the operations there would be almost 10,000--9,786.
The annual payroll for just the three companies is over
$257 million. Health-care benefits provided for the workers
total $63 million. The local hospital that these employees
provide with their health-care coverage almost 8 percent of
their total revenue, that would incur a loss to the local
hospital of $7 million to $8 million, plus the increase in
charity care when these benefits would cease. It would put them
out of business.
This transaction would also bankrupt the State of Ohio's
unemployment insurance fund. The impact to the schools, to city
and county government, nonprofits and local business would be
devastating. Our data analysis indicates that one in five small
businesses will fail if this transaction goes through.
If I sound alarmist, it is because we are facing an
economic catastrophe of unparalleled proportion. We are not
trying to save jobs of the old technology that have failed to
keep pace with competition and the new economy. These are 21st-
century jobs: pilots and crew members, supply chain and
logistics professionals, aircraft and airframe mechanics,
conveyer engineers. And this is not a case of the Rust Belt
versus the Sun Belt. These jobs will simply disappear.
In 2004, we welcomed DHL and ASTAR Air Cargo into the
Wilmington family. ABX Air and its predecessor, Airborne
Express, accounting for over 6,000 of these jobs, have been
with us for 30 years. They are part of the fabric of our
community. There is an air park employee in one of every three
households in the city of Wilmington. Many husbands and wives
work there together. Many family farms were saved because of
part-time work at the air park that provided the health care
that they needed to continue. Students at Wilmington College,
many the first in family to go to college, work at the air park
to reduce their indebtedness upon graduation. In short, these
jobs just didn't appear in 2004. Over the last 30 years, the
community has grown with the growth of the air park. This
proposal would rip the fabric of our community.
Now, I don't know what the criteria or the definition for
``antitrust'' is. I am a simple mayor from a small town in
southwestern Ohio. DHL and UPS say this is a contractor-vendor
relationship. But to abandon your largest hub and deliver the
freight to your number-one competitor, then I say it is a de
facto merger.
Given the recent history of acquisitions of smaller air
carriers by both companies and the significant antitrust
waivers embedded in the Open Skies agreements, a picture starts
to form. In Wilmington, a foreign-owned company, with huge
assistance from the State and local government, took over
ownership and operation of the largest private airport in the
United States, a state-of-the-art facility. In a little over 3
short years, if they complete this transaction, they will have
taken two American companies off the board, both of which had
significant market share. In the process, they will displace
almost 10,000 American jobs.
You know, at the end of the day, this is about people.
These are not just numbers; they are our friends, our
neighbors, our families. How will they pay their mortgage? How
will they feed and clothe their kids? How will they educate
their children? Please think about these hard-working Americans
as you consider these issues.
Thank you so much for the opportunity to testify.
[Material submitted by Mr. Raizk follows:]
Material Submitted by the Honorable David L. Raizk
Mr. Conyers. Thank you, Mayor. We are impressed by your
international knowledge of the circumstances that bring us here
today and also of your deep devotion to the city of Wilmington,
which you clearly love so much.
Well, Members of the Committee, we now turn to the chief
executive officer of DHL, Mr. John Mullen, who is, as well, a
member of the management board of DHL's parent company. He is
an experienced person in this area of cargo transportation. He
has served on the boards of Telstra Corporation, Embarq
Corporation, as well as a member of the International Swimming
Hall of Fame. He is an all-around person, carrying a rather
large responsibility at this hearing because so many issues
have been raised, so many questions unanswered, that, in all
fairness, we might feel obligated to give you as much time as
everybody else before you has had, but obviously that is not
possible. I regret it.
But nevertheless, it is very interesting that this company,
founded in 1969 by Adrian Dalsey, Larry Hillblom and Robert
Lynn as an express delivery service between San Francisco and
Honolulu, has grown, was purchased, indeed, by the German
Government. And because of Federal laws prohibiting foreign
control of domestic air carriers, DHL's U.S.-based air carrier
was sold off, eventually becoming ASTAR Air Cargo. And, in
2003, DHL acquired Airborne Express and, due to those same
prohibitions of foreign ownership of domestic air carriers,
sold off Airborne Express air carrier, as what eventually
became ABX Air.
And so this international commercial activity, still
located in little old Wilmington, is something that brings us
all here to anxiously await your comments and explanation and
anything else you would like to contribute to this hearing. And
we are very pleased that you could come, Mr. Mullen.
TESTIMONY OF JOHN P. MULLEN, CEO, DHL EXPRESS
Mr. Mullen. Thank you very much, Mr. Chairman.
Chairman Conyers, distinguished Members of the Committee, I
thank you very much for the opportunity to be here today and to
explain to you a little bit about the situation that DHL is in
on the proposed contract between ourselves and UPS.
You will have received my written testimony. I hope you
have had a chance to read it. In the interest of time, because
I know it is pressing, I will try to paraphrase that as quickly
as I can.
Mr. Chairman, DHL is in a very difficult situation. For
over 5 years, we have battled to break into the U.S. market,
and we have spent over $6 billion doing this. We have made a
lot of progress, and we are very proud of that progress. But
the reality is it has come at a huge cost, and today we are
losing some $5 million a day or close to $1.3 billion a year.
The air express market that we are operating in is shrinking,
and there is intense competition for declining volume. On top
of that, we are now facing a rapidly worsening economy and the
impact of rising jet fuel, as well.
Now, we are a large company, but no company can lose this
amount of money and survive. We are under intense pressure from
our shareholders, from analysts and other external parties, and
we simply have to take action. And with volumes declining as
they are, this means, of course, we have to take out cost.
Now, we have exhaustively examined all of the options that
we think are open to us, from a number of restructuring options
to potential partnerships, even to closing down altogether in
this country.
And on May 28, as a result of all of that analysis, we
announced a restructuring plan for the U.S. business of DHL
Express, which is in two parts: Firstly, we aim to restructure
some of our ground operations, largely closing some of the
stations in remote areas. But secondly, we announced the
intention to enter into a contract with UPS to replace existing
two subcontractors that provide airline haul for us with one,
being UPS. Our goal here is to save around $1 billion per
annum.
Now, no solution is ideal, and in the situation that we
find ourselves in there is no silver bullet, there is no simple
solution. But we think that this is the best possible outcome
for us, for our company and our shareholders. And it is the
only option that will allow us to remain a viable competitor,
and thereby preserving competition here.
I would like to highlight, if I may, a few key points in
respect to the proposed contract with UPS.
Firstly, it is not a merger, it is not an alliance, it is
not a joint venture, it is not a transfer of assets. We are
simply replacing two existing subcontractors with one new one
in one part of our business, which is the air carriage of our
parcels. DHL remains as independent afterwards as it was
before. All of our other operations--our pick-up and delivery,
our billing, our customer service, our information technology,
et cetera--all of those remain exactly as before. Indeed, the
customer himself will not see any difference. If we are moving
a package from New York to Los Angeles, the customer doesn't
know now on what aircraft that travels; does it go on an ASTAR,
an ABX, a DHL or UPS?
Furthermore, this is, in our view, a very common solution.
In industries where a large amount of capital is tied up in
fixed assets, capacity-sharing is common. In the passenger
airline industry, code-sharing has existed for quite some time.
In the marine industry, shipping lines have collated and used
each other's space for a long time. And in our own industry,
here in the United States, some years ago, United States Parcel
Service, with their competitive parcel product, did exactly the
same thing: They closed the hub and outsourced that lift to
FedEx, to Federal Express.
Now, those are things that we had to do, and we recognize,
of course, that no such change comes without an impact. We are
hugely sensitive to the impact that this decision will have on
Wilmington, on the local community, on our subcontractors and
all the individuals that will be touched by it. And it is not a
decision that has been taken lightly. We have absolutely
agonized over this, I can assure you.
We formed a team that is putting a huge effort into
mitigating this impact. We realize, of course, that there is
nothing that we can do that will entirely mitigate the impact
on those directly affected. But we are working to put in place
a plan which we believe goes well beyond any contractual or
legal obligation that we have and well beyond the normal course
of action that a company would take in this situation.
There are three components to that plan. Firstly, we expect
to allocate $260 million in severance, pension and health
benefits. Of that $260 million, only $35 million represents our
contractual and legal obligation. The remaining $225 million
are benefits over and above that we are willingly paying, not
only to our own employees, but to the employees of
subcontractor companies. Secondly, we are working with local
State and community officials to try to help families and local
businesses affected by these plans. And thirdly, the local
community has asked us of our intentions with the air park, and
we have expressed great willingness to sit down and discuss the
future of that air park and if that can be useful to the
community going forward.
So, in conclusion, Mr. Chairman, may I summarize again,
this has been a terribly difficult decisions for us. We are
losing $1.3 billion in a declining market, and we have no
option but to cut costs. We have considered every option, and
now we plan to implement a solution that addresses this
situation.
Such a plan will obviously not be liked by those effected,
but it is not a merger and it is not anticompetitive. It is
common in industry generally, and it is common in our industry,
where it has existed here in our industry in the United States.
We believe that this will leave us as a viable competitor,
thereby preserving competition in the U.S. marketplace. And
last but most importantly of all, we are doing our very, very
best to try to mitigate the impact that this decision will
have.
Mr. Chairman, distinguished Members of the Committee, thank
you very much for your attention, and I look forward to
responding to any questions that you may have.
[The prepared statement of Mr. Mullen follows:]
Prepared Statement of John P. Mullen
Mr. Conyers. Thank you, Mr. Mullen. We appreciate that
introduction into understanding the other side of this problem
that brings us here today.
The other part of this outsourcing merger agreement, as it
is called more correctly by you--or outsourcing agreement, not
a merger, is the distinction you impressed the Committee with--
the other part of this is UPS. And the president of corporate
transportation for UPS is Mr. Burt Wallace.
In 1980, he started as a package handler in UPS's Atlantic
District, and over the next three decades, through hard work
and skill and intense preparation, he worked his way up to the
executive suite and is now the president of corporate
transportation for UPS since 2005.
We have your testimony. Mr. Wallace, we welcome you here
for your comments.
TESTIMONY OF BURT WALLACE, SENIOR VICE PRESIDENT OF CORPORATE
TRANSPORTATION, UPS
Mr. Wallace. Thank you, Mr. Chairman.
Chairman Conyers and Members of the Committee, UPS welcomes
the opportunity to appear before you today to present as
clearly as possible the facts regarding UPS's proposed
agreement with DHL.
On May 28th, 2008, UPS and DHL announced that the companies
were working toward an agreement for UPS to provide airlift of
DHL's express, deferred and international package volume within
the United States and to and from Canada and Mexico. We are
still negotiating this agreement.
The proposed agreement is part of a larger restructuring by
DHL designed to reduce its cost and to help the company to
remain competitive in the U.S. It has been widely reported that
this restructuring has several elements, including engaging the
U.S. Postal Service to provide ``last-mile'' delivery of some
of DHL's packages.
DHL has stated very publicly and clearly that it will not
be able to compete effectively or perhaps remain in the U.S.
without restructuring its operations and cost. The company has
reported that it expects to lose $1.3 billion in the U.S. this
year.
Mr. Chairman and Members of the Committee, let me state as
clearly as I can: The anticipated agreement between UPS and DHL
is not a merger or joint venture, it is not an acquisition, it
is not a consolidation. UPS and DHL continue to compete
independently. We will each price and market our own brands and
services. We will not share profits, cost, or information about
pricing of services to each other's customers.
Under the proposed agreement, UPS will act as a vendor to
DHL, providing contractual services in the same way that
carriers in our industry, including UPS and Federal Express,
provide services to the United States Postal Service. This type
of arrangement, where one company provides service to a
competitor, is found throughout the transportation industry,
including the trucking, rail and ocean carriage. It is also
found in other industries, such as natural gas and
telecommunications.
UPS will not provide pick-up or delivery of packages to DHL
customers. DHL will deliver packages to UPS airport locations
for movement through UPS's air network to destination airports.
DHL will then pick up the packages from the destination
airports for final delivery to its customers. This is the same
service currently being provided to DHL by two vendors, ABX and
ASTAR.
The anticipated agreement, in short, is simply an airlift
contract, one part of the restructuring that DHL has concluded
will significantly reduce its cost in the United States.
There has been a great deal of discussion about the impact
of DHL's restructuring on the job market in the Wilmington,
Ohio, region. UPS is a company that has a long history of
providing good jobs and benefits for employees. We understand
the importance communities place on attracting and retaining
employment opportunities for their residents.
It is very important to note in this regard that the
expected result of DHL's restructuring will be to preserve
approximately 40,000 DHL-related jobs in the U.S. that would
otherwise be as risk. Further, the agreement with DHL will help
to bring additional job security to more than 14,000 UPS
employees in Ohio and 358,000 UPS employees in the United
States.
I should note that, in 2003, UPS employed 317,000 people in
the U.S., and since then we have added more than 41,000
employees to our payroll, which is 14,300 more people than the
average total number of employees among the Fortune 500.
It is our hope that growing our business will allow UPS to
continue to increase the number of jobs throughout Ohio, the
country and the world. Any suggestion that UPS could somehow
manipulate the way in which DHL packages move through our
system to gain a competitive advantage is simply untrue and
gives DHL far too little credit for being able to protect
itself. Let me assure you that DHL is a tough negotiator, fully
able to protect its interest. UPS will continue to compete
vigorously with DHL and others in the U.S. And around the
world, and we fully expect DHL to compete vigorously as well.
DHL's restructuring, including its agreement with UPS,
actually preserves competition in the package delivery business
in the U.S. Now, you might ask, why would UPS want to do
something that helps a competitor remain in the market? For
UPS, our goal is to find profitable opportunities such as this
to better utilize our existing capacity, make us a more
efficient competitor, and allow us to create and provide career
stability for our employees. In short, this proposed agreement
represents a wise and efficient use of our assets. It helps
protect the job of 358,000 UPS employees in the U.S. And if we
didn't pursue this agreement, one of our competitors would
have.
Mr. Chairman, thank you for the opportunity to share UPS's
perspective on the agreement that helps to strengthen a UPS
company that provides career opportunities to hundreds of
thousands of people. I hope the facts that I have outlined
today address the questions and concerns of the Committee. I
stand ready to answer any further questions that you and the
Committee may have. Thank you.
[The prepared statement of Mr. Wallace follows:]
Prepared Statement of Burt Wallace
Mr. Conyers. Thanks for your presentation. It is beginning
to introduce, between you and Mr. Mullen, the other side of
this economic challenge that we have here. We begin to get a
little balance in. It does not answer all the questions by a
long shot. Well, it hasn't answered any of the questions. But
stay tuned.
Captain Ross, David Ross, president of Teamsters Local
1224. A former Air Force pilot, earned all kinds of
distinguished military honors and awards and commendations.
Served in Operation Desert Storm and others.
We welcome you to the hearing and are delighted to share
your perspective on the problem that confronts us.
TESTIMONY OF DAVID ROSS, PRESIDENT, TEAMSTERS
LOCAL 224, ON BEHALF OF THE PILOTS OF ABX AIR
Mr. Ross. Thank you, sir.
Mr. Chairman, Congressman Chabot, distinguished Members of
the Committee, I am grateful you have called this hearing
because this issue is so terribly important to our national
economy and so many workers, not just in Ohio but across the
country.
Proof of that is that you have called the hearing. Further
proof of that is that I have had the distinct privilege of
personally briefing both Presidential candidates in the
election, Senator John McCain and Senator Barack Obama. I
personally heard them express their concerns about the
antitrust issues and job losses generated by this
anticompetitive deal between DHL and DHS.
As you know, Mr. Chairman----
Mr. Conyers. I notice that you mentioned Senator McCain's
name first. Can we read anything into that?
Mr. Ross. Sir, I have got Senator Obama's name first in my
notes, sir. I am not sure how that happened.
Mr. Conyers. Oh, okay.
Mr. Ross. But I will get back to Senator Obama.
Mr. Conyers. Freudian slip, I dare say. All right. Thank
you very much.
Mr. Chabot. Mr. Chairman, I am sure it was just
alphabetical order.
Mr. Conyers. Oh, all right.
Mr. Ross. There we go. Thank you, Mr. Chabot.
Mr. Conyers. More than likely.
Mr. Ross. As you know, Mr. Chairman, Senator Obama wrote
the White House and Senator McCain wrote the Senate and
Antitrust Committee, both expressing their concerns about the
anticompetitive effects of this deal.
Senator Obama had requested an additional meeting with me
this morning in Ohio. I couldn't jeopardize my testimony here,
so the Chairman of my governmental affairs committee is pinch-
hitting for me. However, Senator Obama's continuing interest
demonstrates how important this issue is.
Also this morning, Senator McCain was in Lebanon, Ohio, a
neighboring town of Wilmington.
Mr. Chairman, the effect of this proposed transaction will
be to reduce the competition in the air express market from
three to two. DHL, with the smallest market share and the
greatest incentive to compete on price and service, is being
neutered as a legitimate competitor.
Why do I say this? First, if this transaction is
consummated, DHL will have to rely on its supposed competitor,
UPS, for its most vital operations: air transport, tracking and
sorting.
Second, a key element of the express delivery business is
in package tracking. It is the backbone of the service process.
By combining efforts in this process, DHL will be transferring
highly sensitive proprietary commercial information about its
customers and about its market to UPS. A critical element of
the express package delivery is scanning the bar code. Once the
bar code is scanned, an incredible amount of proprietary
commercial information is exchanged between the different
segments of service, from pick-up to final delivery.
We, the employees of ABX Air who sort, transport and track
DHL packages, have 5 years of detailed knowledge of the
information DHL transfers through ABX necessary for those
functions. We know firsthand what information will have to be
passed from DHL to UPS in order for UPS to perform the
functions currently done by ABX Air. Having watched express
packages go through the sort for over 16 years and being in
constant contact with the people doing the sorting, I can tell
you there is no way UPS can transport, sort and track DHL
packages without material and proprietary commercial
information being transmitted by DHL to UPS.
From a notional view, it makes no sense to rely on a major
competitor for key elements of your service, especially in such
a consolidated marketplace. Indeed, there is every incentive
for DHL propriety information to be disseminated throughout the
sales and corporate organizations of UPS to the competitive
detriment of DHL.
Perhaps DHL will seek to construct a Chinese wall, perhaps
in the form of confidentiality agreements, that limit the
dissemination. Unfortunately, Chinese walls leak and
confidentiality agreements are breached. A deal like this would
leave the UPS-DHL strategic alliance with 54 percent of the
express delivery market and FedEx with 43 percent of the
market, resulting in a monster duopoly and a combined market
share of 96 percent. This will eliminate the competition in
this consolidated industry that supports thousands of small
businesses and millions of consumers across America perhaps
forever.
DHL says they must pursue this agreement because they have
a cost problem, but not once have they approached me for labor
concessions either directly or indirectly. As a labor leader, I
am honored to represent the hardworking and professional pilots
of ABX Air and the workers of the community of Wilmington,
Ohio. They don't want handouts and false promises; they want
jobs. They are loyal and committed employees who consistently
perform just as well, if not better, as anybody in the
industry. Give them a chance.
Mr. Chairman, you and this Committee can help give them
that chance. We respectfully request that you ask the Antitrust
Division of the Justice Department to review this transaction.
I was pleased this morning to hear that they are, in fact,
going to voluntarily go in front of the Department once the
deal is done. I would ask them to take one further step and,
once the deal is done, go in front of Justice Department and do
not implement the deal until it has been cleared by the Justice
Department.
I look forward to answering your questions about our
capabilities and past performances, our discussions with DHL
and air express operations. Thank you very much for the
opportunity, sir.
[The prepared statement of Mr. Ross follows:]
Prepared Statement of David Ross
Mr. Chairman and Members of the Committee, I am grateful you have
called this hearing because this issue is so terribly important to our
national economy and so many workers in Ohio. Proof of that, is you
have called this hearing. Further proof of that, is I have had the
distinct privilege of personally briefing both Presidential candidates
in this election, Senator Barack Obama and Senator John McCain. I have
personally heard them express their concerns about the antitrust issues
raised and job losses generated by this anticompetitive deal between
UPS and DHL. As you know, Mr. Chairman, Senator Obama wrote the White
House and Senator McCain wrote the Antitrust Subcommittee in the United
States Senate, both expressing their concerns about the anti-
competitive effects of this deal. We are grateful this issue has raised
such an important and necessary policy discussion as it impacts the
workers I am honored to represent. Mr. Chairman, I respectfully request
that this Committee demand that this Justice Department initiate an
investigation and enforce the antitrust laws of this country.
My name is Dave Ross, and I am a Captain with ABX Air. I am also
the President of Teamsters Local 1224 that represents pilots who fly
for ABX Air. I graduated from the United States Air Force Academy in
1983, I flew as an instructor and an evaluator in the T-37 and B-52,
and I flew in Desert Storm where I was awarded two Air Medals and the
Distinguished Flying Cross. I only mention my military credentials
because I want to emphasize that I am proud of my service and defense
of our American way of life. Mr. Chairman and members of the Committee,
thank you for inviting me to testify before you on the elimination of
competition in the domestic air express market brought about by a
proposed transaction between two dominant air express carriers--DHL and
UPS. DHL's restructuring announcement threatens the careers of our
members and their ability to provide for their families. As the
President of Teamsters Local 1224, with the backing of the
International Brotherhood of Teamsters, I testify before you on their
behalf. Also, I am hear to speak about a potential economic crisis that
threatens a small town in Ohio called Wilmington. This pending economic
crisis was brought about by two global corporate giants who seek to
merge their services and destroy competition as we know it in the air
express market.
You probably remember our airline as Airborne Express. Airborne
Express entered the express delivery business in the forties,
delivering tropical flowers from Hawaii. Airborne rapidly expanded with
a domestic focus while serving the shipping needs of business customers
and specialty services. Airborne purchased Clinton Country Air Force
Base in 1980, and developed it as the Wilmington Air Park. While
enjoying a relatively low cost structure, Airborne was a consistent
third competitor in the domestic express delivery market that offered a
lower priced alternative to consumers and small businesses.
Airborne Express and DHL had reciprocal strengths. While Airborne
established itself as a strong competitor in the U.S., DHL dominated
the international market. DHL began in California, and even though they
were strong internationally, they represented only a small share of the
U.S. market. Deutsche Post World Net invested in DHL, and gradually
increased their investment until gaining 100% ownership in 2002. Soon
thereafter, DHL purchased Airborne Express promising to increase market
shares and profitability of both partners, improve services for
consumers, and increase competition. At the time of the purchase,
Deutsche Post praised the complimentary service portfolios of the two
airlines and Airborne's broad ground network.
After the purchase, DHL operated two airlines in the U.S.--Airborne
Express and DHL Airways. In Europe, DHL operates two airlines--European
Air Transport based in Brussels and DHL Air UK based in East Midlands.
Accordingly, any suggestion they can't operate successfully in the U.S.
with two airlines is contradicted by their operations elsewhere. DHL
also operates DHL Middle East based at Bahrain and DHL Latin American
based in Panama City. More recently, DHL announced plans to forge an
alliance--a joint venture--between it and Lufthansa Cargo called
AeroLogic, with each having a fifty percent share and flying cargo from
a new sort hub at Leipzig/Halle airport. The opening ceremony for that
hub was on May 26th, and attended by the Mayor of Wilmington, Ohio.
That was two days before DHL's announcement that will devastate
Wilmington, Ohio.
DHL's entry into the U.S. market triggered a proceeding before the
Department of Transportation because of well-established citizenship
laws for U.S. air carriers, and the airlines that carry express
packages for DHL were renamed. Airborne Express became ABX while
operating at the Wilmington Airport, and DHL Airways become Astar while
operating sixty miles southwest at the Cincinnati/Kentucky
International Airport. DHL effectively controlled these two express
cargo airlines through two separate long-term contracts called ACMI
Agreements, whereby the airlines provide services for aircraft, crew,
maintenance and insurance. Through these ACMI Agreements, DHL
controlled the routes, the on-time performance criteria, third party
services, and any changes of ownership (changes of control). The two
airlines provided express delivery service on a cost plus basis, with
ABX reimbursed for all expenses plus a base markup of 1.75% of revenues
and an incentive for performance which could increase the markup to
2.5%. ABX also has a Hub Services contract with DHL to operate the sort
center in Wilmington and other regional sort hubs in cities like
Roanoke, Virginia.
Through the control exercised by DHL, service declined and market
share suffered. While DHL proposes this alliance with UPS because of
cost problems, the reality is they've created a revenue problem because
they mismanaged the business of express delivery service.
In the air express business, on-time-performance is critical to
customer service. At the time DHL purchased Airborne Express, Airborne
had an 18.4% share of the market. From 2003 to 2007, with DHL in
control, rather than realizing the synergies and complimentary
strengths of Airborne and DHL International, service declined and
package volumes declined. Market share at DHL/Airborne declined more
than 25%, while FedEx and UPS gained 10.3% and 11.2% respectively. A
catastrophic service collapse occurred in September 2005, when DHL
mismanaged combining the two sort facilities into one at the Wilmington
Air Park. Rather than integrate the sort facilities over time, they
tried to do it in one night. In a service industry like this, where on-
time-performance is measured in tenths of percentage points, on-time-
performance dropped below 70% and did not recover for months because of
decisions made by DHL managers and the effective control they exercised
through contractual Agreements.
While Deutsche Post spoke of increased competition and expanded
service when they purchased Airborne Express, the reality is service
declined and they now propose to no longer compete. As a result,
competition itself is threatened in the express package delivery
business. When on-time-performance declined, market share declined.
Market share for the dominant players, one brown and the other purple,
increased commensurately. While problems arose with the consolidation,
DHL continued their managerial pursuits with unswerving determination
but with negative results. They operated two airlines, with two
divergent CEO's, two middle management structures, two airline support
structures, and two very different aircraft fleets.
At ABX, we fly more than forty fuel-efficient Boeing 767 aircraft
that have Category II and III capability which allows us to land in
nearly all weather conditions. ABX has an established history of
delivering high margin express packages for the lowest cost with
impeccable reliability. DHL has expressed concern that some of our
aircraft are equipped to handle packages in ``C'' containers rather
than ``A'' containers. First and foremost, express delivery customers
are concerned with consistent on-time-performance. Second, some
customers specifically request ``C'' container handling to ensure
security of high-value shipments. Third, FedEx recently deployed a
``Micro A'' container which is essentially six ``C''-like containers
that are fastened together before loading to realize the benefits of
the ``C'' container. Our system benefited in through-sort capability by
using the smaller container, and provided more security and breakage
protection.
Friction between senior management at DHL and ABX publicly surfaced
when DHL withheld a pre-payment of about $9 million to ABX under the
ACMI Agreement because they believed ABX was exceeding a 10% revenue
threshold from non-DHL customers and demanded reallocation of overhead
expenses related to non-DHL business. ABX declared DHL in default.
Before that, Astar CEO John Dasburg attempted to acquire ABX for $7.75
per share in August 2007, but ABX CEO Joe Hete rejected the offer
without a counter-offer and with minimal, if any, rationale. On the
last day of 2007, ABX acquired two airlines made up largely of old and
fuel-inefficient aircraft for $332 million and created a holding
company, Air Transport Services Group, of which ABX is now under. DHL
demanded full repayment for a $90 million note because of a change of
control at ABX. Today, ATSG stock is valued at a small fraction of its
worth at the time DHL purchased Airborne Express and ABX shareholders
have suffered. The relationship between DHL, ABX and Astar involves
conflicting corporate egos, clashing cultures, and inconceivable
blunders that have brought great pain to employees and surrounding
communities. Yet, nobody has taken responsibility for the failures that
have occurred. Airborne Express was a profitable company that never had
a losing year and only one losing quarter. How can a thriving global
corporation such a Deutsche Post World Net turn such a consistently
competitive company into a venture they now claim stands to lose more
than 1 billion dollars a year, while themselves, made pre-tax profit of
more than 3.2 billion euros last year and more than 3.8 billion euros
the year before that?
If this third competitor in the air express market is lost,
competition in the air express industry will be gone forever and the
express package delivery market will be permanently changed. Antitrust
laws exist to ensure competition in the free market system. They
prohibit anticompetitive behavior, monopolies, and unfair business
practices. As an operator in express delivery business for more than
sixteen years, there are two important things I have observed. First,
impeccable on-time-performance is nearly everything in this business.
Second, competition in this business is good. FedEx and UPS are fierce
competitors, and without a reliable third consumer choice they would no
longer have to contend with pricing pressure. The total revenue for the
U.S. air freight and express industry was more than $32 billion last
year, an industry record. The two industry giants, FedEx and UPS,
continue to advertise strongly for express delivery customers. In a
letter to the U.S. Justice Department, the Chair and Ranking Member of
the Senate Judiciary Subcommittee on Antitrust, neither of whom are
from Ohio, have said there may be antitrust issues raised by the
proposed deal between DHL and UPS, and we agree. According to Mergers &
Acquisitions Report, FedEx backed out of a deal with Deutsche Post
earlier this year because of antitrust concerns.\1\
---------------------------------------------------------------------------
\1\ ``FedEx Eyeing Deal to Buy DHL'', Ken MacFadyen, Mergers &
Acquisitions Report, Feb. 4, 2008.
---------------------------------------------------------------------------
A key element of the express delivery business is package tracking.
It is the backbone of this service process. By combining efforts in
this process, DHL and UPS will be sharing highly sensitive proprietary
information that would normally be closely guarded by real competitors.
Even if barriers to information sharing could be erected, the
temptation for collusion would be too risky for consumers. A critical
element of express package delivery is scanning the bar code. Once the
bar code is scanned, an incredible amount of secret proprietary
information is exchanged between the different segments of service--
from pick-up, to transit, to sort, to transit, and to final delivery.
Having watched express packages go through the sort for sixteen years,
and being in constant contact with the people doing the sorting, there
is no way UPS can sort and deliver DHL packages without material
commercial proprietary information being transmitted to UPS. True
competitors erect every guard possible against exposing such sensitive
proprietary information from the public, and now DHL proposes to make
it freely available to a supposed competitor. While a technological
``Chinese wall'' may be developed to guard against information sharing,
the same technology may be used to look over, around, or through that
wall. Consistent customer service and real pricing pressure will come
only from true competition.
From a notional view, it makes no sense to rely on a major
competitor for a key element of your service, especially in such a
consolidated marketplace. It makes no sense to announce a deal like
this before the terms of the deal are agreed upon. It defies belief
that a competitive choice will be available, even to DHL, when the ten
year proposed contract with UPS ends. A deal like this would leave the
UPS-DHL strategic alliance with 54% of the express delivery market and
FedEx with 42% of the market; resulting in a monster duopoly having a
combined market share of 96%. This will eliminate competition in this
consolidated industry that supports thousands of small business and
millions of consumers across America--perhaps forever. When considering
the size and ferocity of the competition, and the long-term capital
investment required for an airline, the FAA and other licensing
requirements, and many other barriers to entry, stopping this
anticompetitive deal is the last chance for three competitors in the
U.S. air express market. Another potential harm is to the Civil Reserve
Air Fleet. ABX has seventeen fuel-efficient Boeing 767's dedicated to
the Civil Reserve Air Fleet, and Astar has another seventeen aircraft
so dedicated, which could be lost.
Since their restructuring announcement, according to the dhl-usa
web-site, the earliest DHL can deliver express packages at many
locations is 5 pm. For more remote areas, the earliest DHL can deliver
``DHL Next Day'' service is one week. The earliest DHL can deliver an
express package from D.C. to a district office in Lorain, Ohio is noon.
The earliest they can deliver an express package from D.C. to La Crosse
or Ladysmith, Wisconsin is 5 pm, but still listed as ``DHL Next Day 12
pm''. The earliest they can deliver from D.C. to Harrisonburg or
Staunton, Virginia is 5 pm. For Big Stone Gap or Pulaski, Virginia, as
well, the earliest they deliver is 5 pm. The type of service DHL offers
since their restructuring announcement is no longer competitive in the
air express market and consumers are responding appropriately. If this
trend continues, consumers and small businesses will be left with only
two viable choices since the market will be 96% dominated by a duopoly
with FedEx and a constructively merged UPS-DHL. Specialty services,
such as a very late pick-up for a cancer treatment drug maker who
shipped out of Nashville and a very early delivery for a drug testing
company in Kansas City, are being lost. Wal-Mart announced they ended
their agreement with DHL from their jewelry division because DHL
changed their flight route patterns.
A justification given by this profitable global corporation for
their restructuring decision is the foreign ownership restrictions in
the U.S. The citizenship rules for U.S. airlines are well-established.
As became apparent in 2001, after fanatics decided to use airplanes as
their weapon of choice, the airline business is different than other
businesses. Our citizenship laws ensure close oversight of U.S. air
carriers to ensure the highest level of safety and security for the
traveling public and the people living below America's airspace. The
airline industry has unique labor concerns because of the mobile labor
dynamic involved, and the citizenship laws allow our labor laws to be
properly applied. Finally, our citizenship laws ensure our passenger
and cargo airlines are fully available to the Civil Reserve Air Fleet
(CRAF) to fulfill the unique interrelationship between civil and
military use. Furthermore, it is doubtful Deutsche Post and DHL Express
would have done anything differently if they had a 51.1% or greater
ownership interest in Astar rather than the 49% ownership interest they
have.
The restructuring proposed by Deutsche Post, if allowed, will be an
economic disaster for Wilmington, Ohio. More than 8,200 jobs will be
unnecessarily destroyed in a small town of about 13,000 people. Many of
the maintenance workers and sorters have worked at the DHL Air Park,
formerly the Airborne Air Park, for decades. Many work through the
night while living on their family farms in rural Ohio. Their jobs
provide health insurance that has allowed them to work those farms in
addition to earning a paycheck. The tax base will be devastated,
medical and school funding will suffer, and small businesses will
suffer. The psychological impact on families, with layoffs of this
scale, will be long-term. For wage earners who support their families,
there will be trauma when they are no longer able to provide for their
children. For many, this will be the most traumatic event in their
lives.
DHL says they have a cost problem, but not once have they
approached me for labor concessions, directly or indirectly. As a labor
leader, I am honored to represent the hard-working and professional
pilots of ABX Air and the community of Wilmington, Ohio. These are
Ohioans. These are Americans. Even after DHL's devastating
announcement, they continue to provide impeccable performance. They
show up every day, holding onto hope that DHL will change its mind.
They hope that their willingness to work hard will be recognized, and
that DHL will do the right thing. They work hard. They keep performing.
They don't want meager hand-outs and false promises, they want jobs.
They are loyal and committed employees that can perform just as well,
if not better, than anybody else in this business. Give them a chance.
Mr. Chairman, you and this Committee can help give them that
chance. We respectfully request you ask the Antitrust Division of the
Justice Department to review this transaction. And Mr. Mullen, if you
are so confident of your position, why don't you voluntarily submit to
a Department of Justice review and silence your critics.
Mr. Conyers. Thank you, Captain Ross.
The international president of the Air Line Pilots
Association is Captain John Prater, a 29-year veteran in his
association and also a member of the executive council of the
AFL-CIO.
We welcome you here today, sir.
TESTIMONY OF JOHN PRATER, PRESIDENT,
AIR LINE PILOTS ASSOCIATION, INTERNATIONAL
Mr. Prater. Thank you, Mr. Chairman.
Chairman Conyers, Members of the Committee, the remarks
reminded me of a story. I met Larry Hillblom, one of the
founders of DHL, over a labor issue. The labor issue was that
they were going to change the deal that they had in Guam. I
flew to Guam, I met with Larry Hillblom and the Governor, and
in 1 day we had saved the jobs, we had protected the entity and
the community that was in our home, Hagatna, Guam. It can be
done. There are solutions. But they have to be willing to talk.
On behalf of the 53,000 ALPA pilots in the United States
and Canada, I am certainly honored to testify on their behalf
today. I am here specifically to speak on behalf of 500 pilots
that ALPA represents, but we are concerned about all of the
workers in the communities that will be affected by this
transaction.
I am reminded that the last time I was before the chairman
we were talking about bankruptcy and its impact on workers and
communities. Here we have today another transaction. They can't
quite find the name for that transaction, but I haven't heard
any level or any balance. What I do know is this is one bad
deal. It is bad for my members, it is bad for ASTAR, it is bad
for Air Express competition, it is bad for southwestern Ohio,
and it is bad for American workers. For that reason, it is
important that Congress look carefully at the proposed
arrangement and ensure that it is thoroughly reviewed by
antitrust authorities before it is consummated.
The overall impact of the transfer of all DHL flying from
the ASTAR and ABX hub operations in Wilmington will be
enormous: a loss of more than 10,000 jobs and a dramatic
reduction in the economic activities in southwestern Ohio.
I want to thank all of the elected officials from Ohio,
from both sides of the aisle, that have given this so much
interest. But I would especially like to thank Senator Brown,
who spent a lot of time with me trying to seek and find a
solution.
My written testimony contains a detailed roadmap through a
confusing set of corporate decisions that lead to one
destination: disaster. That map includes secret discussions
between UPS and Deutsche Post which they hid from affected
companies, employees and public officials. In ALPA's case, the
secrecy was clearly intended to deprive us of the chance to
protect our members' jobs, both in bargaining and litigation.
Neither the result nor the procedure used to achieve it is in
the interest of the U.S. economy.
Our first clue came on May 28th of this year when Deutsche
Post, the German-based parent company of DHL, announced that it
was negotiating to transfer all North American flying presently
performed by ASTAR and ABX to its competitor, UPS. We were
surprised for several reasons.
First, Deutsche Post has a 49 percent ownership stake in
ASTAR and representatives serve on its board of directors.
Despite those close ties, the company utterly failed to inform
either ASTAR or its employees that it had been negotiating with
UPS for 6 months. While Deutsche Post was cutting its deal with
UPS, ASTAR was negotiating a collective bargaining agreement
with ALPA that was potentially paving the way to raid our
pilots of their jobs.
In 2003, Deutsche Post sought to expand its North American
operations to become a bona fide competitor to FedEx and UPS by
purchasing Airborne, merging its ground operations into DHL's
and spinning off its air operations as ABX Air. But once
Deutsche Post, or DHL, entered into the same sort of commercial
arrangement with ABX as it had with ASTAR, they renounced any
obligation to adhere to the collective bargaining agreement
with my union. This led to several years of litigation.
Meanwhile, negotiations over a new contract between ASTAR
and ALPA began in 2005 and continued through the beginning of
this year. The central issue in these negotiations was no great
surprise; it was job security. What we did not realize--and
this was one very important detail--was that DHL and its
parent, Deutsche Post, were negotiating to hand over all flying
to UPS.
Meanwhile, DHL was making demands for revisions in the job
security provisions of the tentative agreement between ASTAR
and ALPA, including settlement of our litigation, which we see
now was designed to clear the way for this secret arrangement
with UPS.
As I said, one bad deal.
I will close by reminding the Committee what DHL, which had
been acquired by Deutsche Post, said in justifying that
acquisition back in 2003 prospectus. And I quote, ``The UPS-
FedEx duopoly today has a 79 percent share of the U.S. air
express delivery market verses Airborne and DHL's combined 21
percent market share. The Airborne-DHL combination will act as
stronger third competitor in the expedited door-to-door
delivery of small packages and documents, and will have the
ability to bring reduced prices and better service to small-
and medium-sized businesses.''
No aspect of this prediction turned out to be true.
Deutsche Post managed to take two niche competitors with a
portfolio of premium business customers and likely survivors in
the industry, consolidate and restructure them to its needs,
and then run them into the ground. Now, after stripping both
carriers of their ground operations, it proposes to leave the
airlines and our workers for dead. It is hard to see how the
proposed DHL-UPS alliance will benefit consumers. As I said,
this is one bad deal.
We ask the Committee to ask the parties not to implement
their deal until it has been reviewed by either the Department
of Justice or the Federal Trade Commission.
I thank you and look forward to answering any questions the
Committee may have.
[The prepared statement of Mr. Prater follows:]
Prepared Statement of John Prater
Good afternoon. I am Captain John Prater and I am President of the
Air Line Pilots Association, International (ALPA) representing some
53,000 pilots in the United States and Canada. I am testifying today on
behalf of the 500 pilots ALPA represents at ASTAR Air Cargo, a group of
pilots which has flown packages and cargo for DHL for over twenty
years, on the proposed arrangement between Deutsche Post, (recently
renamed DPWN) and United Parcel Service to provide all lift for DHL's
air overnight service.
I believe our concern is well known. On May 28th, 2008, Deutsche
Post, the German-based parent Company of DHL, announced that it was
negotiating to transfer all North American flying presently performed
in its service by ASTAR--as well as that performed by ABX--to United
Parcel Service. Despite the fact that Deutsche Post had, and continues
to have, a 49% ownership stake in ASTAR and representatives on its
Board of Directors, it did not inform either ASTAR or its employees
that it had been in negotiations with UPS for the previous six months
to arrange to have it perform all of ASTAR's services until that press
conference. If the transaction announced on May 28th is consummated and
the government chooses to ignore the obvious anticompetitive impact of
the deal, ASTAR will cease to exist and every one of our members at
this carrier will be on the street. However, ALPA represented pilots
and other ASTAR employees will obviously not be the only affected
group. The state of Ohio has estimated that the immediate impact of the
transfer of all DHL flying from the ASTAR and ABX hub of operations in
Wilmington, Ohio will be a loss of over 10,000 jobs and a dramatic
reduction in economic activity in Southwestern Ohio. In short, the
impact on both our membership and on their friends and neighbors in the
region will be catastrophic, and for that reason alone it is important
that Congress and the Department of Justice look carefully into this
matter.
background
Three U.S. entrepreneurs established DHL in the late 1970s as a
provider of freight forwarding and courier services. It established air
operations to support its delivery service in the 1980s and, by the end
of that decade, had sorting operations and a hub in the Greater
Cincinnati/Northern Kentucky Airport. DHL, along with Airborne Express,
became competitors to FedEx and United Parcel Service in the domestic
express package industry. In 1990 the DHL pilots voted to be
represented by the Air Line Pilots Association and, since that time,
ALPA has negotiated four collective bargaining agreements with DHL and
its successors, culminating in the 2008 Agreement.
In 2001 Deutsche Post purchased DHL and spun off its airline
subsidiary, DHL Airways, which was later renamed ASTAR Air Cargo. Based
on the requirements of the 1998 collective bargaining agreement it
signed with ALPA, DHL was still bound to assign its flying to ALPA
represented pilots on the ASTAR seniority list and it continued to do
so pursuant to what is known as an Aircraft, Crew, Maintenance, and
Insurance (ACMI) Agreement with ASTAR. Under that agreement DHL
reimbursed ASTAR for the costs of the collective bargaining agreement
with ALPA, and the labor contract was incorporated by reference into
the ACMI Agreement. In addition, pursuant to federal aviation statutes,
majority ownership in ASTAR was transferred to American citizens and
eventually ended up in the control of former Northwest Airlines CEO
John Dasburg and his investor colleagues.
However, in 2003 Deutsche Post, seeking to expand its North
American operations in order to become a bona fide competitor to FedEx
and UPS, purchased Airborne Express, merged its ground operations into
DHL's, and spun off its air operations, which became ABX Air. It
entered into the same sort of commercial arrangement with ABX as it had
with ASTAR, and then renounced any obligation to adhere to the
requirements in the collective bargaining agreement it had signed with
ALPA's ASTAR pilots. This lead to several years of litigation based on
an absurd ruling from the National Labor Relations Board barring ALPA
from taking its contractual claim against DHL to a neutral arbitrator--
a ruling which was eventually reversed by a unanimous Court of Appeals
in 2008.
While this dispute was working its way through the NLRB and the
courts, negotiations over a new collective bargaining agreement between
ASTAR and ALPA began in 2005 and continued through the beginning of
2008. The central issue in these negotiations was, not surprisingly,
job security and the extent to which our members could continue to
perform the flying they had performed throughout the history of DHL.
What we did not realize as we reached the crucial stage of this
negotiation in January of 2008 was that DHL and its parent, Deutsche
Post--which in the summer of 2007 had extended its ACMI agreement with
ASTAR through 2019 and, at the same time, also took a 49% ownership
interest in ASTAR and placed representatives on its Board of
Directors--were in negotiations with United Parcel Service to have UPS
perform all of ASTAR's flying operations. DHL not only withheld
knowledge of these negotiations from both ASTAR and ALPA, it also made
demands for revisions in the job security provisions of the tentative
collective bargaining agreement between ASTAR and ALPA--including
settlement of litigation between ALPA and DHL--that in retrospect were
obviously designed to clear the way for its secret arrangement with
UPS.
The misrepresentations and material omissions made by DHL to ASTAR
and ALPA in order to influence our negotiations is now the subject of
litigation and we, of course, understand that these issues are not the
subject of this hearing. However, in reviewing the competitive impact
of the proposed arrangement between DHL and UPS, as well as its impact
on the southern Ohio communities which have depended on the employment
provided by both ASTAR and ABX for several decades, the fact that this
deal was made in secret without the opportunity for competitive
bidding, and with the clear intent of depriving the affected parties of
an opportunity to protect themselves or respond, is obviously relevant
in assessing the legitimacy of what Deutsche Post is doing.
THE IMPACT OF THE ARRANGEMENT
Prior to the acquisition and integration of DHL and Airborne
Express in 2003 by Deutsche Post there were four major private sector
players in the U.S. express package industry: FedEx, UPS, Airborne
Express, and DHL. The United States Postal Service also supplied a
competitive service, the fate of which will be discussed later in our
testimony. As can be seen from attached Table 1, at that time FedEx and
UPS were the major providers of service, but each of the other
competitors had established niches.
When DHL, which had already been acquired by Deutsche Post, further
consolidated the industry by purchasing Airborne it made the following
representations justifying the decision in a 2003 prospectus:
The UPS/FedEx duopoly today has a 79% share of the U.S. air express
delivery market (versus Airborne and DHL's combined 21% market share).
The Airborne/DHL combination will act as a stronger third
competitor in the expedited door to door delivery of small packages and
documents and will have the ability to bring reduced prices and better
service to small and medium-sized businesses.
In the markets Airborne competes in today, made up primarily of
large, corporate accounts, its price levels are substantially lower
than its competitors. The expanded DHL company will have the capital
and resources to leverage this value into the small to mid-sized
marketplace.
No aspect of this prediction turned out to be true. The air express
market is more concentrated than ever, with what DHL described as the
FedEx/UPS ``duopoly'' in control of an even greater share of express
package volume and revenue than in 2003. (See attached Tables 2-4.)
As can also be seen, the consolidation of DHL and Airborne has
diminished, not enhanced, the market share of the combined entity,
which now controls less than 10% of express package revenue. The bottom
line of this is clear--Deutsche Post managed to take two niche
competitors with a portfolio of premium business customers, both of
which were likely survivors in the industry, consolidate and
restructure them to its needs, and then run them into the ground. Now,
after stripping both carriers of their ground operations, it proposes
to leave the airlines for dead.
This is an unconscionable result simply based on it's ramifications
for affected employees and consumers. However, we also note ASTAR
provides major support for the Civil Reserve Air Fleet (CRAF), and if
this deal is allowed to go through, our government will be denied
access to a substantial part of the lift it is counting on and, in fact
is using on routine basis. This Committee should understand that the
CRAF contract in place is between United States and ASTAR, not DHL.
Why has this happened? Both ASTAR and ABX have met all performance
targets set for them by DHL and have provided 99% on time performance.
The pilot workforces at both carriers, while reasonably compensated,
are not as well compensated as pilots at UPS or FedEx. DHL's problem in
North America is not the cost or effectiveness of its air operations.
Its problem has been providing effective enough service on the ground
to take market share from UPS or FedEx. This problem will not be solved
by switching to another provider of lift, much less by transferring
this responsibility to DHL's principle competitor. To put it simply,
DHL's difficulties in North America are not due to the cost or
effectiveness of its lift, but rather with its inability to effectively
implement the ambitious business strategy it announced in 2003.
In this respect, Deutsche Post has pointed to the contract for lift
between the United States Postal Service and FedEx as an example of and
precedent for what it is trying to do. This precedent is inapplicable.
To begin with, the USPS is not even covered by US antitrust laws and
the cost and rendition of its service is carefully regulated. More
important, less than one percent of the USPS' volume is express or
expedited delivery. Hence, the Postal Service only competes with FedEx
in a very narrow portion of its product line. By contrast, UPS offers a
competing product for virtually every DHL offering. Finally, as can be
seen in the tables we have presented, while FedEx has supplied
excellent service to the USPS, the USPS/FedEx contract has not been an
effective formula for preserving market share for the Postal Service's
express mail product.
In this matter, it strikes us as obvious that relying on your
principle competitor for your primary mode of transportation and giving
it close to perfect information on your pricing strategy is not a good
way to maintain, much less enhance, a corporation's market share.
Indeed, the erosion of DHL's market share is probably already
occurring. Many DHL customers have been targeted by UPS and have been
told that DHL's service is now dependent on UPS and pointing out the
comparable services provided by UPS. DHL has not yet provided investors
with a tally of the impact of the announcement of the DHL/UPS deal on
reduced volume run through DHL's Wilmington hub, but the feedback we
are getting from flight crews and sort personnel is that the negative
impact of this announcement has been significant and volume has been
appreciably diminished. It is obvious that DHL products will lose
market share, and the so-called ``duopoly'' that Deutsche Post claimed
that it wished to address will become more entrenched as the result of
this arrangement.
conclusion
As pointed out earlier, the discussions between UPS and Deutsche
Post occurred in secret and neither the providers of lift nor public
officials in Ohio were told anything about it until the May 28, 2008
press conference. The reason for this seems obvious: the company
officials promoting this arrangement did not want to provide adversely
impacted parties or citizens with an opportunity to point out the flaws
in the plan or develop alternatives. Indeed, the flaws in the announced
plan are so obvious that we suggest DPWN may have additional components
to the strategy which it has not yet made public.
In ALPA's case, the secrecy was clearly intended to deprive us of
the chance to attempt to protect ourselves both in bargaining and by
continuing litigation that we undoubtedly would have maintained had we
known of DHL's true plans. In short, we have an arrangement which will
inevitably eliminate competition and employment, cooked up in secret in
order to bypass affected companies and US citizens. Neither the result
nor the procedure used to achieve it are good or in the interest of the
US economy. For these reasons, we believe the transfer of DHL's lift to
UPS requires, at the very least, careful scrutiny by this Committee and
the agency it oversees, the Department of Justice, before the deal is
consummated.
Thank you for your time and interest in this important matter. I
will be happy to answer any questions.
ATTACHMENT
Mr. Conyers. Thank you so much, Captain Prater.
Mr. Conyers. Attorney David Balto is one of our leading
independent antitrust experts. For more than 20 years, he has
been an attorney of antitrust law in the private sector. He has
worked in the Department of Justice. He has plied his trade in
the Federal Trade Commission and currently he is a senior
fellow at the Center for American progress. We have your
statement and we welcome you to this hearing.
TESTIMONY OF DAVID A. BALTO, ATTORNEY AT LAW
Mr. Balto. Thank you, Mr. Chairman and other distinguished
Members of the Committee, for the privilege of testifying
before you today. I am here representing consumers and the
Consumer Federation of America and, as detailed in my
testimony, I am here testifying because this alliance raises
serious competitive concerns that could potentially lead to
significantly higher prices for millions of consumers,
businesses--large and small--that use express delivery package
services. I base my testimony on my 19 years of experience as a
trial attorney at the Antitrust Division and a senior antitrust
enforcer at the Department of Justice.
Let me be clear about this. If this was a merger, this
hearing wouldn't occur today. Why? Because these parties would
be in court right now with the Justice Department, because this
merger would be clearly anti-competitive. It reduces the number
of competitors from 3 to 2. You don't have to be a Ph.D.
economist to realize that the easiest way to dance the waltz of
collusion is when there are only two partners on the dance
floor. That is why in 100 years of Clayton Act jurisprudence,
no court has approved a merger to duopoly except where entry
was easy, and entry ain't easy in this case.
So is the alliance they have formed a big enough difference
to justify this under the antitrust laws? I don't think so.
First of all, they suggest that alliances between competitors
are somehow not immune from the antitrust laws. Anytime that
UPS and DHL enter into any kind of agreement, either tacit or
explicit, it is scrutinized under section 1 of the Sherman Act.
The critical question is how that impacts the incentive and
ability of those two firms to compete.
In this case, those questions are clearly answered in the
negative. First, DHL will be dependent on UPS for its entire
air transportation services. As the Ohio delegation has
observed through this arrangement, DHL will surrender control
over cost and service quality to one of its chief competitors.
We are not talking about buying a few seats on an airplane. We
are talking about the heart and arteries of these two firms'
businesses. In this setting, it is hard to imagine how DHL will
have the ability to challenge UPS and FedEx by lowering prices
or improving service. In response, UPS can easily discipline
DHL by mismanaging delivery, increasing costs, or reducing
services.
Second, as Captain Ross has testified, through this
arrangement UPS can gather a wealth of competitively sensitive
information about DHL's customers' pricing and competitive
initiatives. With this information, UPS can selectively target
DHL customers, offering them special discounts and other
services.
The parties may say there are firewalls. I give you an
example in my testimony of a situation where a judge rejected a
promise of a firewall to approve an otherwise anti competitive
merger.
Third, through this arrangement UPS can engage in price
squeezes, basically lowering prices to its customers, raising
the cost to DHL, diminishing its ability to compete.
I understand the parties say this deal is not problematic
because the Postal Service entered into a deal with FedEx, I
think that proves the point. How has the Postal Service done
since that deal? Rather poorly. They are becoming competitively
inconsequential.
Why should this Committee, why should the Antitrust
Division assume that there should be anything different from an
UPS-DHL agreement? My testimony goes into great detail about
why the weakened financial status of DHL cannot justify this
merger as an antitrust enforcer. That is an argument I heard
over and over again.
I wrote a law review article, looking back at cases where
that argument was made. And you know what, Mr. Chairman? In
every case those companies survived. They found better
managers, better financing, they kept competing.
Finally, I am concerned that the Antitrust Division has not
opened an investigation of this merger. I could be wrong, but
if they haven't, it is a mistake. This deal can be consummated
the moment that agreement is signed. The moment that agreement
is signed, this market will be changed irretrievably. The time
to secure information about the potential effects of this
arrangement is now, not after DHL becomes a captive passenger
on the UPS railroad. Once that deal is consummated, it is going
to be extraordinarily difficult to unscramble the eggs. Once
that deal is consummated, it is going to be really hard for the
antitrust agencies to get customers to give an independent view
and to complain about the merger.
What these parties should do is they should enter into a
voluntary agreement to have the Justice Department investigate,
and not consummate that agreement until the government
completes their investigation.
You might think that is unusual. It actually is not that
unusual. Google and Yahoo are doing it right now with the
Justice Department. What with Google and Yahoo, no one is going
to lose their job if that agreement gets reached. With Google
and Yahoo, no one is going to lose their health care if that
agreement is reached.
If DHL and UPS believe in their obligations as corporate
citizens, they should go and enter that agreement to give the
Justice Department a chance, a fair chance to make a full
evaluation of the competitive effects. That is what the purpose
of the antitrust laws are. That is why consumers need an
investigation. Thank you.
[The prepared statement of Mr. Balto follows:]
Prepared Statement of David A. Balto
Mr. Conyers. Thank you, Attorney Balto.
I notice in our guests here today there are a lot of white
shirts and epaulets. Would all the pilots and those connected
with the airlines please stand up? Are you here to exercise
your first amendment rights or intimidate the Committee? Please
sit down. Thank you for coming.
Before I turn this over to Steve Chabot, our distinguished
colleague from Cincinnati, I would like to invite Mr. Mullen
and Mr. Wallace in this conversation we are having today to
make a few comments that they may choose to make about anything
they have heard or wanted to add to their own testimony.
Mr. Wallace. Yes. Thank you for the opportunity. Just a
couple of observations. You know, there have been comments made
regarding the sharing of information and how that could be
detrimental as an example. We are still negotiating our
potential agreement with DHL, but we understand the importance
of competition and we have talked a lot about making sure that
customer information, as an example, is not shared between the
organizations, that the only information that would be shared
would be information that is necessary to physically transport
and sort the package safely and efficiently.
In terms of our information technology systems, again with
the proposed agreement, we would maintain independent
information technology systems and only pass back and forth,
again, that information that would be required for the safe and
efficient transportation of the package, and would be limited
information. It would not include a customer-specific detail.
That is one thing I wanted to spend a minute on and get
some additional clarification on. In regards to the thought of
a merger, it is our intention to continue to compete vigorously
with DHL. I believe that is Mr. Mullen's intention as well, to
continue to compete vigorously with UPS. UPS will be providing
one portion of the transportation services that are necessary
to accommodate the package delivery business. DHL will maintain
control of their customer relationship, their pricing, their
ground network, the pickup and delivery of their packages to
their customers, and rely on UPS for the air transportation
part. We will not have access to each other's cost structures
as part of this proposed agreement. We will simply act as a
service provider for DHL, which presumably will reduce their
cost and allow them to remain competitive in the industry going
forward.
Mr. Mullen. Thank you, Mr. Chairman. I would echo what my
colleague to my left has just said. Our two companies are very
strong competitors all around the world. We operate in over 200
countries. We are fierce competitors in all of those. This is
one capacity sharing arrangement in one country albeit,
obviously, a very significant and important one.
We have heard a number of things today that I would
respectfully like to try to correct. I have heard that it is a
merger, an alliance. It is in no way a merger or an alliance.
It is purely a capacity sharing operational outsourcing
agreement. We have heard that UPS will perform deliveries on
our behalf, effectively taking over all of DHL's deliveries.
That has never, ever been part of this arrangement. This is
purely a line hold sharing arrangement.
We have heard that UPS will have access to our proprietary
information such as pricing, such as details about customers,
about our costs, et cetera. None of that is true either. We
will only make available what information is necessary for UPS
to perform its contractual commitment to move our packages in
their aircraft. That does not include anything to do with
pricing or sensitive customer data. So even without a Chinese
firewall, even if that wasn't there, we won't simply be
providing enough information for that to be an issue in the
first place. So we are very confident that we can structure an
agreement. We are still working on it. But all of the risks to
us in terms of the diminution of our competitiveness in the
U.S. market are addressed. We haven't finalized that yet, but
we are very confident we will be able to achieve that.
Mr. Conyers. Thank you very much. I am now going to turn
this over to the distinguished gentleman from Ohio, Cincinnati,
Steve Chabot.
Mr. Chabot. Thank you, Mr. Chairman. And thank you for
holding this very important hearing. I want to thank all the
witnesses for taking the time to testify. I know many people,
members--I know Mike Turner in particular has been very
involved in this because it is in his district, but many other
members as well, and obviously our Senators and, Mr. Fisher, we
certainly do appreciate your interest and your insight in this.
You know, at a time when the national unemployment rate is
over 6 percent and the State of Ohio's is over 7 percent,
something like this really couldn't come at a worse time,
especially for a relatively small community like Wilmington
where the impact could be up to almost 10,000 jobs, as the
mayor indicated, and the impact that that will have on so many
people's lives.
So I think it is important that we are taking this with the
utmost seriousness. And although there is not a clear solution
and we haven't, obviously, resolved anything today, getting all
facts out and leaving no stone unturned in considering what
impact this will have and how we can lessen that impact on real
people's lives I think is important.
I would commend the Chairman for taking the time in doing
this and making this effort because it really is important.
Just a couple of questions. Mr. Mullen, first of all, the
airport is privately owned by DHL, and given the immense loss
of jobs expected as a result of this decision and the
significant antitrust implications of your pending agreement
with UPS, would DHL consider relinquishing ownership of the
airport as part of a settlement with the city and the State so
the facility could be redeveloped?
And in addition to that, is the sale of the air park an
option that could be pursued, given your financial state and
the benefit it could bring to Wilmington, and it would seem
like that would be a win-win. Could you comment on that?
And, finally, does the contract with UPS involve exclusive
dealings--and wouldn't a nonexclusive agreement so you could
negotiate, say, with, for example, ASTAR or ABX, wouldn't that
seem to help to come to a reasonable solution here?
Mr. Mullen. The first part of your question, sir, about the
airport, we have consistently expressed complete willingness to
discuss the future of the local airport with the local
community. I personally at the time flew to Columbus and met
with the Governor to offer--that would be very much on the
table. And so I think the working group that is now interacting
between the two sides have that as one of the issues for
discussion. If we can help mitigate the impact by either ceding
that airport or being involved in some form of sale, as you
have said, we will willingly do that.
Mr. Chabot. As to the exclusivity and----
Mr. Mullen. The second part of your question, yes, we do
have a commitment to complete this negotiation with UPS at the
moment.
Mr. Chabot. Thank you. And to anyone who would like to
comment on this, why shouldn't the agreement be met with
skepticism, especially since it is an agreement between two of
the industry's dominant companies, and in many ways isn't it
just an act of industry consolidation? I know that Mr. Mullen
objects to the term ``merger,'' so I will call it industry
consolidation. How does this agreement differ from other
agreements that are in place in the industry, for example,
contracts with the United States Post Office, for example? Do
the benefits of this agreement outweigh the negative impact
that this agreement will have on the Wilmington community and
the State of Ohio? Or is it clear that the negative impacts
would outweigh the agreement?
And I would be happy to hear from any of the members of the
panel who might like to comment. Mr. Mullen, and then Captain
Ross.
Mr. Ross. Yes, sir. Just a little bit--we have talked the
outsourcing--we will call it a vendor relationship, and I would
like to differ. We are a vendor for DHL as ABX Air. The product
we vend is the transport, sorting, and delivery of that
package. In order to do that, we have got the addresses, we
have got the names, we have got the businesses, we have got the
book of business of DHL. We are a vendor.
We also provide as a vendor some very interesting things.
Tracking--some DHL packages are tracked as many as 12 different
locations as they travel from one location in the country to
the other. Without the information of who that customer is and
what the contact is for that customer, that customer cannot
update that package tracking. So I guess if they want to
contract with UPS and not provide all the customer information,
they can get rid of the tracking portion of the DHL package.
Something else we do in the sort is called dimming. As a
package goes through the sort--because now we can send a
package from home, we can print our own labels--there has got
to be a check on that package and what was paid for that
package. In the sort, those packages are dimmed. It is resized
and it is checked to see what was paid for that package. In
addition to that, you have to know the service level of that
package. So all those packages are dimmed as they go through
the sort.
Currently at ABX Air, the dimming of packages saves DHL $1
million per week, $52 million a year by dimming those packages.
But to dim the packages you have to know where that package
came from, who shipped it, what the service level was. We can
give up that too, I guess, if we go to just a bland label with
UPS. I don't think that it is good business.
I think to provide the level of service the customers
demand in today's market and to protect the company, DHL, I
think we need those two capabilities of tracking and dimming.
As far as the USPS portion of this goes, I had an
opportunity to talk to the gentleman that helped structure the
movement of the Postal Service to Federal Express. Most of the
packaging that goes for USPS is through sort. It goes
containerized from aircraft to aircraft. There a small amount
of actual individual package sorting, and that is done with a
blander label; we are going from San Francisco to Seattle. They
do a small portion of that.
And also the USPS, it is a mom-and-pop, it is an occasional
shipper, and I don't really think it is a target of--something
that UPS or FedEx would want to go after. And as said by the
gentleman down at the end, Mr. Balto, UPS has suffered and lost
significant business since Federal Express took over the
sorting of that package.
Mr. Chabot. Thank you. Captain Prater.
Mr. Prater. I will be very brief. DHL purchased two U.S.
companies, drove them into the ground, walked away from them,
walked away from the communities and the workers that were
employed there to provide those services. I have no way of
knowing the full extent of the DHL holdings, but I do know they
own a significant portion, 49 percent of another air transport
U.S.-based company flying between the U.S. and Japan and China.
So where does this all go? I think we need to get our hands
wrapped around it.
Mr. Chabot. Mr. Mullen.
Mr. Mullen. When addressing the question of the value of
this, I would just like to stress one thing again respectfully,
that we face an extremely serious situation here as a company.
While this type of capacity sharing is common in many
industries, it is a first for us. We would not be doing this
unless there was considerable value, obviously, to our company,
and that main value is that we wish to stay in business in the
United States. With losses at 1.3 billion a year, clearly it is
completely unsustainable.
While obviously the impact on the community directly
affected is huge, we also have many tens of thousands of other
employees in this country to worry about. And, you know, one of
the very disagreeable parts of the role of an executive in a
company is to make these sorts of decisions, that we are
jeopardizing the future of nearly 40,000 DHL employees in the
United States unless we can reach an acceptable resolution of
our loss situation. We are not even seeking to eliminate the
loss.
The proposal that we have here, the combination of the
restructuring of our ground operations as well as the
outsourcing with UPS, will save about a billion. That is still
going to leave us in a loss situation of several hundred
million dollars a year, which is a lot of money by anyone's
standards. But we are prepared to continue to bear that level
of loss because we wish to maintain a global network, we wish
to maintain our business in the United States. But we cannot go
on losing over a billion. It is simply unsupportable for a
company of any size.
Mr. Chabot. Yes, sir, Mr. Balto.
Mr. Balto. Look, there is always a temptation to go and try
to tailor arrangements to let the businesses do what they want.
And, you know, I think that would be a real mistake in this
case. No one has asked the question of these folks yet: Why
won't they enter into a voluntary agreement not to consummate
the deal? There is irretrievable harm that will occur if they
consummate the deal and it is anticompetitive. If you can't
trust them to go and do that, how can you trust them to live up
to any of the commitments that they are willing to make in
terms of not sharing information, not abusing rights, you know,
UPS not abusing DHL. I don't know what the answer to that
question is.
Mr. Chabot. Any other panel members that would like to
comment? Okay. If not--yes, Mr. Fisher.
Mr. Fisher. Mr. Chairman, Congressman Chabot, just a point
that I think is worth making. That is, as I said in my
testimony, with all due respect to what Mr. Mullen said, that
they looked at all different alternatives, they did not look at
all different alternatives. Because if they had looked at the
different alternatives they would have sat down with the State
of Ohio. We engage in these kinds of discussions with companies
as large as DHL on a regular basis.
I am not suggesting that we would have had a magic
solution, but I am suggesting that we were prepared, and remain
prepared even to this moment, to sit down with them.
It is my understanding and I have not yet had this
confirmed, Congressman, that the agreement between UPS and DHL
prohibits them from talking to the State of Ohio or anyone else
about any alternative. And if I may ask you to ask them about
that, unless I am allowed to ask them from sitting here, I
would be interested to know if that is the case, because I
think that would be unfortunate because it really means that
they are not really exploring all different alternatives before
pursuing this transaction.
Mr. Chabot. Thank you. Mr. Mullen or Mr. Ross, would you
want to respond to that?
Mr. Mullen. Prior to the final negotiations with UPS, we
explored every opportunity that we could see was conceivably
possible of delivering a saving of the scale that we were
looking for in the United States. Now we are in our final
negotiations with UPS. We do have an obligation for
confidentiality and exclusivity until that contract is either
signed or is not signed. So currently we are bound by that.
Mr. Chabot. Mr. Fisher, let me just ask one final question.
It is my understanding that the State of Ohio responded when
this initially happened a number of years ago, and I think DHL
had invested about 1.2 billion in the infrastructure, and the
State I think gave around $400 million in tax credits and
incentives. And it was in doing that, I think, everybody
thought of this as a long-term venture that was going to be a
long relationship that was going benefit the community for many
years to come. And obviously at this point it hasn't come to
that. But is that--was that the State's investment,
approximately, in this?
Mr. Fisher. Yes. That is true. That was our offer and I
think that all parties had every expectation that this would be
a long-term relationship. And although DHL did not actually
accept and receive all of the incentives that were offered--we
did offer close to $400 million--it is not unusual that a
company will not accept over a certain period of time all those
incentives. I believe that if DHL were not to pursue this
transaction with UPS and were to reconsider for whatever
reason, DHL, if it were to remain, would probably end up
accepting many of the incentives that we have offered. But at
least as of this point, they have accepted some, but not all.
Mr. Chabot. Thank you. And then finally before I yield back
my time, Mr. Chairman, Mayor Raizk, did you want to comment?
Mr. Raizk. Well, a couple of things, Congressman Chabot. I
think it is important to note that I have heard it mentioned
several times here today that DHL is contracting now with two
contractors, but they created those contractors by their
acquisitions of DHL Express and Airborne Express. The two air
carrier contractors were created because of the law that says
that a foreign-owned company cannot hold a flying certificate
and operate an airline. So it is different in that respect
because these two contractors were separate independent
companies at one point in time. And so by their acquisition,
these were created.
So I don't think it is the same relationship between UPS
and DHL as it is between DHL and ASTAR Air Cargo and ABX Air,
Inc.
Secondly, you asked the question about the air park and I
would like to thank Mr. Mullen because I explained to you about
receiving the news on the 28th and he did graciously--and I
want to thank him--give me an audience with him after that
announcement. And we did discuss at that time the possible
transfer of the air park. And the community is very interested
in that. Even if we retain all or part of these jobs, we still
would like to have that piece because we can then redevelop and
diversify our economy in the Wilmington area.
This air park came from the Federal Government to the
citizens of Wilmington, and I think it should return there.
Thank you.
Mr. Chabot. Thank you very much. Mr. Chairman. I yield back
the balance of my time.
Mr. Conyers. The Chair recognizes Steve Cohen from Memphis,
Tennessee.
Mr. Cohen. Thank you, Mr. Chairman. Captain Prater, you
made some kind of statement, it really was a question, but I
guess it was your begging a question statement about the world
and a company that they have a relationship with. Would you
explain what you were kind of alluding to, kind of rhetorical?
Mr. Prater. I believe you're asking about the 49 percent
investment that DHL has made into Polar Worldwide Air Cargo,
which is a 747 operator flying air cargo for DHL out of this
country to Japan and China.
Mr. Cohen. What is your concern about that?
Mr. Prater. The concern is when you watch DHL run two of
their companies into the ground and put their workers on the
scrap heap, where are they going to go with the next one? I am
certainly concerned about it. I am not saying it is the same
kind of system. It is international versus domestic. But the
fact is they've shown themselves for what they are here. They
want to get rid of companies they bought, get rid of them out
of the marketplace completely. There will no longer be an ASTAR
or ABX who can supply transportation small package services.
They will be gone. They will be gone and there will not be any
competitors.
Mr. Cohen. The only competitor--FedEx would still be a
competitor, would they not?
Mr. Prater. If you call working that close as a competitor.
Now, I know UPS is, obviously from some of their own
literature, trying to take advantage of the situation that
their new partner DHL is trying to do and say. DHL customers,
you can't trust DHL because they are undergoing these big
problems. They may have potential rate fluctuations, potential
pickup and delivery. They are no longer a single carrier
responsibility. Maybe question their customer service.
On the one hand they are trying to show they are competing
with them or driving them into the ground. And on the other
hand they are cutting deals with them. So who are you going to
believe? What side of--you know, what side of this deal is good
for anyone, except we have heard DHL. They don't want to take
care of anybody else but their company. They do have a
responsibility. They have been doing business in this country
as a U.S. company, and yet they want to walk away from certain
responsibilities.
Mr. Cohen. Mr. Wallace, you heard what Captain Prater said.
I guess it is really Mr. Mullen. DHL owns 40 percent of Polar;
is that correct?
Mr. Mullen. That is correct.
Mr. Cohen. Is there any grain of a truth to what he is
saying, that maybe all would kind of not--kind of continue
Polar?
Mr. Mullen. Obviously we don't buy companies to try to
drive them into the ground. We regret more than anybody the
difficulties that we have had here in the United States. The
Polar case, we previously used Northwest Airlines for carriage
across the Pacific. Northwest Airlines itself has gone into
financial difficulties, as you probably know. That started to
put intense pressure on the service levels and the security of
our lift to and from the United States and Asia. As a result,
we made a strategic decision to invest in Polar in order to
have some more security over that lift, without which we felt
that any time Northwest could go into the final stages of
bankruptcy or other things could happen and we would be left
with no capabilities whatsoever between the Pacific and the
United States. That is why we invested in Polar.
Mr. Cohen. Do you have any intentions, or do you think it
might be that you want to switch from Polar and switch your
business to UPS?
Mr. Mullen. We have not had any discussion with UPS about
any of that type of intercontinental lift. Polar, we have a
long-term arrangement with the aircraft. We have committed to a
very large fixed commitment and we have no such intention at
the current time.
Mr. Cohen. So is Polar a successful venture for you?
Mr. Mullen. Polar was a general cargo carrier when we
acquired it. The purpose of acquiring it, as I said, is to
transform it into an express timetable in order to support our
express business. We will continue to offer some general cargo
services, but we will change the nature of the company so that
it supports our intercontinental express business.
Mr. Cohen. Did you ever consider the same kind of agreement
that you want to enter into with UPS and considered looking at
FedEx to do it?
Mr. Mullen. We have talked off and on with almost every
player in the United States, trying to find a solution to this.
Mr. Cohen. And ``every player'' means FedEx and UPS? Is
there a third?
Mr. Mullen. FedEx, UPS, the United States Postal Service
and others.
Mr. Cohen. Okay. Thank you, Mr. Chairman.
Mr. Conyers. Bob Goodlatte of Virginia.
Mr. Issa. Mr. Chairman, with Mr. Goodlatte's permission, I
will be going next.
Mr. Conyers. All right. We are delighted to recognize the
gentleman from California, who has served this Committee with
such distinction.
Mr. Issa. I thank the gentleman from Michigan, my
colleague. And as a former Ohioan and a Member of Congress who
represents, at least to the south, March Air Force Base, a
major gate, a DHL facility, I find myself with the same problem
that the first panel had, portions of the second panel had, and
many Members on the dais. We are as conflicted as a Congress in
this situation as any of you at the table. And I say that
because I would like to be able to say, oh, isn't this going to
be great? We are going to gain huge efficiency for people who
get packages delivered, we are going to save money. We are
talking about our economy and we are not going to lose 13,000
jobs here, many jobs north of San Diego and my district at
March Air Force Base. It is all going to be perfect.
I don't think it is going to be perfect. So let me walk
through a couple of things that appear to be here because we
are looking at this as an antitrust task force, but we are
obviously all looking at it parochially. It seems like
Wilmington really wants their air base back. They would like to
keep the job, but they would like to have the alternate
opportunity and it seems like DHL is willing to participate in
that in a very aggressive way.
For DHL you are a global giant, a postal company, a postal
government company, as I understand it as a parent, and you
operate, as you said, in 200 nations. If you continue to lose
$5 million a day, how long before you would have to evacuate--
and this is for Mr. Mullen--how long before you would have to
evacuate the United States in some way, shape, or form if you
don't do something?
Mr. Mullen. We obviously haven't made a specific decision
on a date or on any particular scenario.
Mr. Issa. But your pockets do have limits to their depth?
Mr. Mullen. They most definitely do. And that is the point
I was trying to make before. Unless we find a way of reducing
our current level of losses to a manageable level, then we
would have to take far more radical action. I can't say what
that would be, but it would obviously be----
Mr. Issa. And we are all operating in veiled ``what ifs.''
But I am concerned for the U.S. economy, but I am also
concerned for competitiveness, which is the primary thing here.
If you are able to stem your losses with this alliance, does
this in general bolster your global ability to compete against
FedEx and UPS because the rest of the system is comparatively
less of a problem or at least, let's just say, this makes this
portion not as much of a problem as it has been; is that
correct?
Mr. Mullen. That is correct. We have a----
Mr. Issa. And you are going to save approximately how much,
would you guess, not including one-time charges on this
conversion?
Mr. Mullen. The UPS arrangement is part of quite a
complicated restructuring plan with quite a number of other
components to it, including restructuring ground operations and
other things. But the total of all of that, we aim to save $1
billion a year.
Mr. Issa. Okay. That is $3 million a day, plus or minus. It
could add up to real money even here in Washington. That is
supposed to be an applause line, but it is awfully old.
Mr. Wallace, are you going to make money on this? Is that
UPS's intention, to make a pretty good chunk of money on
carrying this vast amount of packages?
Mr. Wallace. It is our intention to be profitable with
this, yes.
Mr. Issa. And the only way for you to do that is in fact to
increase efficiencies, because you are saving somebody over
their current level of efficiency, right?
Mr. Wallace. That is correct. We would be utilizing our
existing air networking facilities.
Mr. Issa. And you will add less jobs than are taken away,
but you will add jobs in this transaction?
Mr. Wallace. We are still working through the----
Mr. Issa. There has to be a pilot or two somewhere there.
Mr. Wallace. We are still working through the details of
the agreement. So it is difficult at this point for me to
estimate the number of jobs that could be created.
Mr. Issa. Right. I am not asking for that. But those jobs
presumably would be in Ontario, California, Louisville,
Kentucky. They would be throughout the United States, maybe
Georgia, wherever you have an operation related to their
backbone; is that correct?
Mr. Wallace. That is correct.
Mr. Issa. So on a net basis, America should be more
competitive because DHL will be buying a product for less than
it presently does it itself. You will be making a product that
will be an efficiency, but jobs will be lost on a net basis if
you two achieve what you are trying to achieve?
Mr. Wallace. I can't speak to the total job loss, but
deficiencies will certainly be improved.
Mr. Issa. And I am used to efficiencies meaning job losses.
And Ms. Kaptur looks at that as a bad thing. I am a native
Clevelander and I also realize that we can't compete if we
can't be as competitive as the rest of the world in the total
number of jobs.
So, since my time is going to expire, with the indulgence
of the Chairman, very quickly, the question that I really have
is at the present time between the two parties, conceivably, is
DHL as a result of this arrangement going to be not a global
competitor of UPS's? And that is--my real question is, is there
anything in this arrangement--we realize it is domestic at this
point. Is there anything that would make your two companies not
global competitors?
Mr. Wallace. No, there is not anything I am aware of. We
will be vigorously competing in the global market.
Mr. Issa. I am going to tell you in closing, and I will ask
the others to comment because I don't want to leave them out,
March Air Force Base is a major commitment of DHL and I expect
we will lose it to Ontario, if I understand corporate
restructuring the way it is probably going to happen.
So after Wilmington, probably Temecula and Paris are the
next areas that are going to see job losses. So I am not happy
about that as a parochial matter. What I want to know is--from
the others--if we look at this based on their assurances, is
there any reason today that we believe that DHL will not be a
global competitor of UPS?
And the reason I ask this for the other people on the panel
is proprietary information has been batted around, and I am
very concerned about that. But as long as you are global
competitors, I am going to assume that your two companies are
going to make sure that you have that so-called Chinese
firewall.
So if the Chairman will indulge me to allow the others--I
don't want to shut them out, because to be honest, in a perfect
world, I would rather your side win than the other side. I just
don't see that as likely at this moment. Yes, sir.
Mr. Ross. Sir, if I may. We do a lot of flying out of
Riverside and we appreciate what you have done for that
facility there. So thank you very much. I know Mr. Mullen has
mentioned this is the first of the coloading as he refers to,
globally. So I guess the question would be: Are we going to
coload with UPS in Europe, UPS in Asia, is it going to be TNT?
I guess if this is a start of a global coloading, who is the
rest of the world going to be coloaded with, with DHL?
Mr. Issa. Yes, sir.
Mr. Balto. Yes. I just wanted to make, you know, one point.
The concern from an antitrust perspective is solely that of
American consumers. And your constituents in San Diego are
ultimately going to pay more for the--you know, having express
delivery services. This is not just a problem that can be
solved just through a Chinese firewall. These two firms will
now be contented in a symbiotic fashion, unlike the way they
are now. Are you really going to try to steal sales from your
supplier? That is highly unlikely if you are very dependent on
them and if they are sort of in the catbird seat of being able
to discipline you. My experience as a trial attorney in the
Antitrust Division, when we uncovered cartel arrangements,
there often was that element of firms being in the supply
relationship. That is how they were able to enforce the cartel.
That is why you have to be very concerned about any kind of
supply arrangement like this.
Mr. Issa. Thank you. Thank you, Mr. Chairman, and I look
forward to looking at the Yahoo situation in the same light, as
these are important issues.
On the reauthorization tomorrow, Mr. Chairman, I will
obviously support the good work that this task force has done.
I yield back.
Mr. Conyers. I thank you, Darrell Issa, for your
contributions this afternoon. The Chair recognizes Bill
Delahunt of Massachusetts, a Member of this Committee, as well
as a very effective Member on the Foreign Affairs Committee.
Mr. Delahunt. I thank you, Mr. Conyers. Mr. Balto, I hear
what you are saying about the concerns and I agree with that.
But I think what I have noted since I have been here six terms,
almost 12 years, is there has to be an effective monitoring
post for any merger that requires the resources in the
Antitrust Division of the Department of Justice that simply
doesn't exist today. And if you'd care to comment on that.
I am just going to follow up with one other question and it
deals with this Chinese firewall. But I have always been
concerned that in Justice there is not sufficient resources to
adequately reveal the potential or real negative consequences
for the American consumer. There are just not enough bodies.
Would you care to comment on that?
Mr. Balto. That is correct. The Antitrust Division is not a
regulator. That is why, as a general matter, they strongly
prefer structural remedies rather than behavioral remedies. If
given a choice, we prefer--the antitrust agencies would prefer
firms not to merge if the condition that is necessary is some
kind of regulatory relief.
Mr. Delahunt. There are mergers that do occur and for all
intents and purposes are free from any oversight, free from any
scrutiny thereafter.
Mr. Balto. Yes, lots of mergers are procompetitive and pose
no anticompetitive issues.
Mr. Delahunt. So I think in terms of this particular task
force, that is an issue that ought to be looked at. In terms of
the firewall and the relationship between UPS and DHL--and I
guess I would direct this to either Mr. Wallace or Mr. Mullen.
In terms of the sensitive information that is out there about
pricing and other--I don't know if it is a correct term, but
``proprietary'' information, how do you construct that
firewall? How do you maintain that competition, given an
alliance between yourselves that would create a whole different
relationship?
Mr. Mullen. Well, the first thing I would say to that is we
don't intend to provide sensitive information such as pricing
at all. So there is no need for a--it just simply won't occur.
The only data that will be provided is operational data that is
required by UPS to allow them to physically move the package.
They don't need access to details on pricing or particular
customer arrangements or any of those matters that have been
raised.
Mr. Delahunt. Mr. Wallace.
Mr. Wallace. I agree with that. And the only additional
comment is----
Mr. Delahunt. How can we be reassured that that is not
going to happen, I guess, is what I am saying.
Mr. Wallace. Well, first of all, in the proposed contract
that we----
Mr. Delahunt. Particularly given what I noted earlier about
the lack of resources available in terms of ensuring compliance
with that kind of an alliance, that kind of a contract.
Mr. Wallace. Well, UPS structures its business deals to
ensure that anticompetition is not an issue. I am sure that the
proposed contract will also address that competitive sensitive
information very specifically in the contract. We are
competitors, as we talked about, and even today we are trying
to compete for additional express business while we are in
negotiations on this other transaction. Our IT people have
spent a lot of time looking at what they can do technically and
mechanically to create that firewall and have spoken with
confidence that is achievable. The only information that we
will pass between our organization is the information
necessary, as Mr. Mullen said, to transport the package and
move it through our network.
Mr. Delahunt. Okay. Mr. Conyers, I thank you for the time.
I have to run to another hearing and I yield back. Thank you.
Mr. Conyers. Thank you very much. The Chair recognizes Hank
Johnson, an attorney from Georgia, a magistrate in Atlanta, and
a very valued Member of this Committee.
Mr. Johnson. Thank you, Mr. Chairman. How many employees
are at the Wilmington facility, Mr. Mullen? How many employees
does DHL employ at the Wilmington facility?
Mr. Mullen. We employ just over 1,000 ourselves directly.
All of the other employees belong to subcontractors of----
Mr. Johnson. I see. So including the subcontractors, how
many jobs would there be at risk in Wilmington should that
facility close?
Mr. Mullen. I obviously don't have all of the details of
those two companies, but I would answer approximately 10,000.
Mr. Johnson. And that would take place over what period of
time?
Mr. Mullen. We are still discussing that as part of the
implementation phasing that is being negotiated as part of the
contract at the moment. But most likely by the middle of next
year.
Mr. Johnson. Does anyone dispute the assertion that DHL's
expected loss of $1.3 billion in 2008 is accurate? Does anybody
dispute that?
Mr. Fisher. We don't dispute that is a loss. We don't have
any basis for determining whether or not that amount is
accurate.
Mr. Johnson. Nor have any reason to doubt that it is
accurate, do you?
Mr. Fisher. I think that is as far as I will go. We just
have no way to verify one way or the other.
Mr. Johnson. Let me ask, how has the price of jet fuel
impacted the package delivery industry?
Mr. Mullen. It has impacted us very significantly. It has
impacted us in a number of different ways as well. Firstly,
obviously, it increases your cost quite materially. Our whole
industry, much of the passenger airline, industry was built
around oil prices of sort of 20, $30 a barrel. We survived the
passage up to the eighties and nineties. And once it got into--
over the 100's, as we are seeing now, it is a complete shift of
business model for our industry. So it is putting huge pressure
on us from an operational cost point of view.
The other thing it is doing, which is equally significant
and potentially more significant in the long run, that it is
changing our customers buying behavior. So in a market,
particularly an integrated market like the United States, one
of the main reasons why the air market has been shrinking and
continues to shrink is because customers migrate from more
expensive air products to deferred ground products. They simply
can't afford the cost of the express transport any more.
Furthermore, we see on the global scale that that is
starting to affect even supply chains of some of our customers.
So one byproduct of this may well be that you see companies who
outsource capacity production to the Far East, to China, may
start to bring that back closer to home, either to her market
itself, or in the case of the United States maybe Central
America or whatever. In Europe we see our customers shifting
capacity production back to eastern Europe and other closer
locations. So it is having a pretty dramatic effect on our
industry aboard.
Mr. Johnson. Mr. Fisher and Mr. Raizk, even though there
may be some reluctance to accept this $1.3 billion loss
assertion, assuming that it is true that the company is losing
$1.3 billion a year, would the State or local government be
able to offer any economic incentives that would cancel out
that loss on a yearly basis?
Mr. Fisher. Congressman Johnson, I think that when we face
situations like this, it is not so much that the State says we
will cancel your losses out, it says that we will partner with
you to address your losses. A combination of loans, grants, tax
credits, processes that we can offer to the company free of
charge with regard to distribution and logistics, additional
ways that we can help facilitate transactions like the one that
they pursued several years ago, where I believe ASTAR attempted
to purchase ABX, so that they would have one carrier they could
deal with as opposed to two.
Those are all roles that we could, and frankly want to,
play in trying to address these transactions. So the answer is
I don't know whether we could cancel out, as you say, all of
their losses. What I do know is that we could help address
those losses, alleviate them both short term and long term in a
partnership arrangement. It wouldn't be the first time that our
State has done something like that.
Mr. Johnson. Well, I tell you, 10,000 jobs over the next 9
or 10 months is certainly a devastating blow to any State's
economy. How can DHL and UPS work together to accomplish your
objective, but at the same time save jobs in Ohio? And I have
just got to believe there is some way for you all to do that.
How could it be done?
Mr. Mullen. Congressman Johnson, the leverage that this
arrangement has is the utilization of capacity that exists in
the existing UPS network. Were we simply to transfer all of the
jobs from one party to the other, we would not obviously be
addressing the ongoing loss that we have been talking about.
And the reason that UPS can offer us an arrangement like this
is they have some spare capacity which we want to obviously
avail ourselves of.
So it is very hard. Their hub is in a different location
than our hub. Their operation runs different from ours. And I
am not privy, obviously, to how they manage the details of that
operation, but it is not simply a question of being able to
transfer the jobs with the work, I regret.
Mr. Johnson. Any response from UPS?
Mr. Wallace. Any loss of jobs in the U.S. Is very
unfortunate. And, as Mr. Mullen spoke to, our capabilities and
our network at UPS are designed as such that we have the
capability through our regional air hub network to add more
volume into that system. By adding that volume into those
strategic locations, we will eventually create jobs. At this
time, we don't know what the number of jobs will be or exactly
what the jobs will consist of. But clearly we will create jobs
in those locations. Our primary air hub location, Louisville,
Kentucky, which is not that far from Wilmington, Ohio, but
there would be no opportunity for us to leverage the
Wilmington, Ohio facility in our network.
Mr. Johnson. Thank you. Mr. Chairman, I yield back.
Mr. Conyers. Thank you. Attorney Congresswoman Betty
Sutton, distinguished Member of the Rules Committee and
Judiciary.
Ms. Sutton. Thank you, Mr. Chairman. And thank you all for
being here to testify, Lieutenant Governor Fisher, Mayor, all
of you. I appreciate this information coming to light.
Mr. Mullen, I have heard you on that--about how there were
no options but to cut costs, and we have heard the extent of
that need as you express it. And that you looked at every
alternative before you proceeded down this path. But we have
also heard testimony from people on the panel, and Lieutenant
Governor, talking about how they never had the opportunity, the
State of Ohio really didn't have the opportunity, you didn't go
to them to talk about how there might be another path.
We also heard from Captain Ross and Captain Prater. We
heard from Captain Ross that he was never approached about
reducing costs. And Captain Prater in his written testimony
talked about during the negotiations between UPS and Deutsche
Post, they were entered into in secret and that neither ABX or
ASTAR were given a chance to make competitive bids.
So if the ultimate goal was cost savings on all of this,
please respond to those lapses in effort. Because why didn't
DHL, for example, negotiate with all parties to obtain the best
deal possible? Why didn't DHL, after all the State of Ohio has
done to try to be a partner, go back to the State of Ohio and
talk to them about what might be able to be done? Why didn't
DHL talk to Labor about how to potentially cut costs?
And now if I understand correctly, and I would like you to
address this too, after all of that and the failure to even
bother to do any of those things, you have now bound yourself
with the confidentiality agreement that will protect you from
having to answer a lot of these questions. Could you just
respond to that?
Mr. Mullen. Of course I can, Congresswoman Sutton.
Firstly, with respect to the State of Ohio, we looked at
all of the options that we felt could realistically deliver the
scale of savings that we needed. We are talking here about
hundreds and hundreds of millions of dollars. Yes, we did not
go and sit down with the representatives of the State of Ohio
and say, can you save us a billion dollars? We generally
thought that was pretty unlikely, and given confidentiality,
our customer base, employees, et cetera, we ruled that out as a
likely alternative.
With respect to our other subcontractors, that is not the
case; we had extensive discussions with ABX and ASTAR trying to
find a solution to this. There was one solution that would have
offered considerable savings, which is where ASTAR would have
acquired ABX; we would have put the two businesses under
ASTAR's management combined, would have been combined. That
would have saved quite a lot of money. That option was not
driven directly by us, because ASTAR, obviously, is an
independent company. They launched public takeover bid for ABX
that was rejected by ABX directors. That opportunity was closed
off.
We subsequently had a reverse type discussion where ABX
came to us with a proposal. I personally met with some of the
senior management of the company in Germany. We followed that
up with several discussions here in the United States. And
while that was an attractive offer, it came nowhere near as
close to the level of scale of savings that we think we can
generate from the combined proposal that we now are looking at.
So we really did talk to all of the other parties.
We didn't talk directly to labor. The gentlemen on my left
are not employed by DHL; they are employed by our
subcontractors. It's not our prerogative to directly go to the
labor directly. We do talk to the direct employers about how we
can generate such savings.
I think we exhausted every option that we could see that
had a material leverage in solving this problem.
Ms. Sutton. Okay, I tend to disagree, but I appreciate your
response.
Since your competitor at UPS is going to sort the packages,
isn't it the case that you will then have to shutdown many of
your sort facilities across the country under the
restructuring?
Mr. Mullen. We only have two real air hubs in the United
States. One is in Wilmington. The other one is Riverside in
California.
Ms. Sutton. Okay, let me just ask this question a different
way. How many jobs, direct DHL jobs and otherwise, will be
affected by this in terms of loss? Can you give this Committee
a complete list of the jobs that could be affected by this
restructuring plan?
Mr. Mullen. I can't give you a precise number because the
process is that we terminate a contract with our subcontractor,
and that subcontractor in turn then decides how many
redundancies it makes amongst its workforce. For instance, in
ABX's case, I can't speak for them clearly, but I am aware that
they intend to continue in business. They intend to continue
employing pilots and other employees. So we are working with
them. I think I mentioned in my statement, on the mitigation
package, although we are not contractually obliged in ABX's
case, for instance, with air crew to offer severance payments--
that is the responsibility of the subcontractor ABX--we are
more than willing to offer that as part of the mitigation.
I realize you want some numbers. My best understanding of
the impact is somewhere in the 8,000 to 10,000 jobs that are at
risk across our own direct employees and the majority being
employees of other subcontractors, but you would have to speak
to each of those directly to get a precise number.
Ms. Sutton. You are talking about Wilmington only?
Mr. Mullen. Well, we are doing a whole number of things. We
have been closing some of our ground stations in remoter areas
in the country, restructuring pick up and delivery routes and
consolidating stations. In some cities, we maybe have three
stations and are consolidating that down to two. And we are
replacing the two airline subcontractors with one being UPS. So
it is a number of different components.
Ms. Sutton. Since no one responded to Mr. Balto's question
about voluntarily entering into an investigation under DOJ,
will you answer it for me? You said you are very confident it
is not a merger, very confident. So why don't you enter into a
voluntary investigation with DOJ?
Mr. Mullen. Well, firstly, we obviously got extensive
advice when this idea was first mooted and have been informed
very comprehensively there is not an antitrust issue. Despite
that we voluntarily did go to the Department of Justice and
informed them about this. But up until we are told we cannot
complete it or are prevented from doing so, there is no reason
for us not to. The Department is aware.
Obviously, from our perspective, the counterbalance is that
employees and customers and other stakeholders are very
unsettled by all of this, and it behoves us to complete the
transaction as fast as we can. Should the Department see
otherwise, then of course we would cooperate fully in whatever
investigation they chose to launch.
Ms. Sutton. Since, sort of in your answer there, I heard a
hint of you weren't really--you weren't really asked. Let me
ask you directly, will you enter into a voluntary investigation
with DOJ?
Mr. Mullen. Well----
Ms. Sutton. Are you willing to?
Mr. Mullen. We have already spoken to----
Ms. Sutton. I understand.
Mr. Mullen. We can't launch an investigation on ourselves.
We have provided all the information. Anything that they wish
to know about the transaction, we will provide of course,
voluntarily.
Ms. Sutton. So you don't really object to the idea of
undergoing a voluntary investigation? You don't object to that?
Mr. Mullen. No. We obviously have to follow the rule of the
law.
Ms. Sutton. I understand.
Mr. Mullen. Whatever the Department of Justice requires us
to do, we will obviously do. Until such time as they rule one
way or another or oblige us to do something, we will continue
as we are.
Ms. Sutton. I understood your answer.
Would anybody else like to respond?
Mr. Balto. I just hope it is clear from Mr. Mullen's
answer. You know, what companies frequently do is they enter
into an agreement with the agencies not to consummate the deal
until the agency has completed its investigation, is that what
you are promising to do?
Mr. Mullen. Mr. Chairman, should I respond? No, if I can
try to be more precise. We are and will continue to cooperate
with the Department of Justice in any shape or form or any way
that the Department requires. We will provide any information.
We will cooperate with any request that they place upon us.
To date, they have not asked us to do anything other than
continue with--that would prevent us from continuing with this
transaction. As and when they do so, then of course, we would
respect that. But failing that, we will continue to try to
conclude as fast as we can.
Ms. Sutton. I thank the chairman for the time. And I would
just encourage the consideration of this Committee to do all
that it can do to get the Department of Justice to look into
this de facto merger, and obviously, they are willing to
undergo it if we can get the Department of Justice to take on
the responsibility that is its responsibility.
Thank you.
Mr. Conyers. Well, it occurred to us, Congresswoman Sutton,
that there might be an agreement between them to have a
temporary suspension because the work of this Committee cannot
be considered concluded at the end of this hearing.
Congressman Brad Sherman has come in. I am going to
recognize him in a few minutes.
But the fact of the matter is, we need to go, quite
frankly, a lot deeper into this than we have. There are some
documents that occur to our lawyers on the staff and there
are--there's some additional testimony that it seems that I--
that we would feel more comfortable with in trying to determine
what happens.
If we had another hearing and brought in further
authorities involved in the kinds of questions that have been
presented here today, we want to go through this transcript
with great care. And so it occurs to me, piggybacking off your
solution, if we could hold all this in abeyance, I think there
is a lot of discussion that could be entered into between the
seven parties that constitute the witnesses, not to mention the
five other legislators from Ohio. I mean, we would like nothing
better than to get you all in a room with appropriate
refreshments and John Coltrane in the background, and let's
just sit down and put this on the table.
You don't have to read your testimony, which is very
brilliantly contrived and will go into the record. But, I mean,
let's get down on the ground with this, because I think, I
mean, there has been some very strong expressions from the
Lieutenant Governor representing the State of Ohio, the mayor
and from all of you.
We can all leave here saying we got a little bit off our
chest, which is always therapeutic, but that doesn't change the
nature of what brought us here in the first place. And I think,
in view of the fact that we have got to have more hearings, I
would like to try to see if there could be some consensus about
holding this in abeyance until such time as we at least have
one more hearing.
Now we have yet to hear from the Department of Justice, the
Antitrust Division. There are a number of other people that
could help us see where we are here. Now this is a real crisis
that attacks many other areas of our country just in a
different form. It is not the same kind of business or
anything, but the whole country, many parts of our Nation, are
under the same stress.
Now, that being the case, I would like to hope that we
could, without being formal about it, get you parties before
the Judiciary Committee. We made an excellent start at sitting
around the table today, and I applaud you. There has been no
personality problems or vindictiveness. There are clearly
distinct differences of opinion, but that is what brings us
here. That is what the legislature is for. If there were any
differences of opinion, there would be no hearing. If there
were a lot of no hearings, there would be no Judiciary
Committee. I mean, that is what we do.
So I would recommend that all of the parties that have
honored us with their presence today give that some thought.
And I thank the Congresswoman from Ohio for putting that on
the table.
And I would like to turn now to our distinguished colleague
from California, Brad Sherman.
Mr. Sherman. Thank you.
Mr. Mullen, perhaps you could describe for me a little bit
your hub in Riverside, California. Is it served by the Ontario
airport, and is it that close to the airport, and how many jobs
you got there?
Mr. Mullen. I don't have all the details about Riverside to
hand. I can provide you those afterwards in writing if you
would like. But what I can tell you is that it is our West
Coast aviation hub. It has about seven or eight aircraft that
service deliveries that are made between the States west of the
Rockies, so as to avoid packages to move from, say, San
Francisco all the way back to Wilmington and then back again to
Los Angeles. That is the purpose that it fulfills.
Mr. Sherman. Is it your tendency to have your sorting hubs
within a mile of a major airport, because Riverside is not all
that close to a major airport?
Mr. Mullen. No, it is on March Air Force Base, and we have
our sorting facility on the airport itself.
Mr. Sherman. So your planes land at the Air Force Base.
Mr. Mullen. It used to be an Air Force Base. I don't know--
--
Mr. Sherman. So there is a lesser known airport that is--
and your facility in Ohio, is that located close to
Wilmington----
Mr. Mullen. The facility in Wilmington, Ohio, is our main
sort center. That is where we own the airport ourselves, and it
solely operates for our two subcontractors.
Mr. Sherman. We have focused on the 8,000 or so jobs that
are in the transportation industry to the delegation of Ohio.
And because that has been covered so much, I want to focus not
on the jobs in the transportation industry but the jobs and the
economic effect on your customers, because there are a lot of
businesses that have located near your hub because their
business plan required them to be at a major transportation
hub. These folks may be in the warehousing business. These
folks may operate repair facilities, and so people have to ship
stuff that is broken, and obviously they need it back as
quickly as possible; they want it repaired as quickly as
possible. What effect would this non-merger agreement have on
your customers in the greater Wilmington area? How--would
either the amount you charge them be affected because they are
no longer at your hub, or how much lower would their service
be?
Mr. Mullen. Firstly, in that context, what is so really
difficult and distressing about this whole situation is that
all of the stakeholder groups, from customers to the community
and to the employee groups, have been outstanding supporters
and partners. I could not have asked any more from the State
and from the local community. And we couldn't ask for better
cooperation than we have with Captain Ross and some of his
colleagues there who have been simply outstanding employees.
That makes it, as you can imagine, extremely, extremely
difficult.
In the case of customers, it is exactly the same. We have
some very long-standing and good customers who will be affected
by this. We are negotiating individually with the customers
that will be directly impacted around the airpark. For some, it
shouldn't be too much of a problem because they will be able to
truck to Louisville in time, but for others, it will be a major
problem, and they are going to have to make decisions----
Mr. Sherman. Well, let's say somebody used to truck from
your facility in Wilmington, and that was a 1 or 2 mile truck
to transportation, and now they are trucking from Lexington.
Not only is that a delay, but let's focus on the cost. Are they
going to end up being out-of-pocket for the transportation cost
from Lexington to the greater Wilmington area?
Mr. Mullen. Well, clearly, I don't know what new
arrangements those companies will have to make, but I think it
is safe to say it is unlikely to be favorable.
Mr. Sherman. So you're not--obviously, if somebody happens
to be in Lexington already and for some reason wants to use
DHL--they might have used UPS in the past, and of course UPS is
creating more competition for themselves in the Lexington
area--they are going to get the fastest and cheapest DHL
transportation because they are right there at your hub. People
who located their businesses or built their businesses around
the Wilmington area, you are not prepared to say that you are
going to do anything for them other than negotiate at arm's
length.
Mr. Mullen. Well, as part of the total mitigation plan that
we are working on, there are three components. I think I
mentioned, one is to be as generous as we can in terms of
severance.
Mr. Sherman. And that you have quantified in the quarter
billion dollar range.
Mr. Mullen. The second component is to try to work with
local community and businesses that are affected by this
decision. Individual cases is different, and we haven't yet
made any----
Mr. Sherman. So you have quantified what you are going to
do for the employees and the employees of your subcontractors,
but you have given me only the vaguest comments as to what you
are going to do for your customers, other than of course
negotiate with them at arm's length. Can you quantify your
reassurance, other than the fact that you love and respect your
customers and want to help them in every way possible?
Mr. Mullen. Obviously, we would like to keep the customers
where we can. And we will do everything in our power to do
that. If we can help them reorganize the supply chain sources
or manufacture elsewhere or whatever it is. Every one is
different, so there is no blanket answer to that. Some will
undoubtedly----
Mr. Sherman. Have you--you have budgeted a quarter billion
dollars for the employees of yourself and your subcontractors.
How much have you budgeted to help to cut costs for, to give
cost breaks to, to provide free trucking transportation to or
whatever? Is there anything in your budget to mitigate the
effect this has on your customers?
Mr. Mullen. We have not budgeted any specific amount.
Mr. Sherman. We have a quarter billion for the employees
and 0.0 for the affected businesses. I hope you revise this
budget. You know, you are transportation, you have a huge
ripple effect, and you cannot draw a line in your mitigation
and say, well, our employees, the employees of our
subcontractors are affected, but the businesses and the
employees of the businesses of our customers who have built
their business around the fact that you have got a hub there.
You have invited them there. You have given them lower
transportation costs and faster transportation to be there.
That is why they are there. And you have got a budget that, as
far as I can tell, is 0.0 but includes warm words to help those
customers who have been your customers, your partners,
whatever, who have built their businesses in this area. And it
sounds like they are going to have to move--we are not talking
8,000 jobs; they are going to have to move 80,000 jobs to
Lexington or to the hub of yourself or one of your competitors
in order to enjoy the transportation speed and the
transportation cost that they are used to. What can you do to
quantify for me what you are going to do for your customers?
Mr. Mullen. As I said, we have to sit down with those
directly affected around the airpark.
Mr. Sherman. I assume there will be Coltrane music at those
meetings as well, and maybe the Chairman can suggest other
ambiance enhancing aspects at the meeting. You will sit down
with them.
Other than that, can you quantify? I see the Lieutenant
Governor here, and I know he's focused on the 8,000 jobs, and
maybe it is 10, maybe it is 12, maybe it is 15, in the
transportation industry, but you have got the warehousing
industry. You have got the repair industry. You may be talking
about a much bigger economic impact. And I realize these
companies, the transportation jobs, they are going to go if
this thing goes forward. The warehousing jobs, et cetera,
everything is just going to be under strain. The transportation
costs of these other businesses will go up 5, 10, 20 percent.
And maybe they will survive and be able to stay where they are;
maybe they won't. But I would sure feel an awful lot better if,
in designing your mitigation plan, you had more in it for these
customers of yours who are located at your hub and did so
because you are there than, we are going to sit down with them,
and there will be Coltrane music.
Mr. Mullen. We have quantified the direct impact on labor
and on the contractual obligations we have with our
subcontractors, that is why I am able to quote a number. We
have not quantified the impact on other parts of the community,
like local businesses, et cetera, et cetera. We are working on
that, but I am not able as a result to give you----
Mr. Sherman. What can DHL afford to do to mitigate? I mean,
you are under some economic strain here. You are able to afford
a quarter billion dollars for the employees in the
transportation industry. What can you afford to do for your hub
adjacent customers?
Mr. Mullen. I generally don't know, sir. We will have to
find out exactly the scale of and who and how much people are
affected.
Mr. Sherman. I am not asking you what the effect is or what
they deserve. It could be you calculate it all, and the trucks
are moving fast and cheap from Lexington, and the total cost is
a million bucks and why is Sherman even talking about it.
Putting aside what the cost is to your customers, how much
mitigation could you afford for them, assuming that their needs
for mitigation tend to be pretty high?
Mr. Conyers. Could the gentleman yield to the gentlelady
from Ohio for one final question?
Mr. Sherman. I would be thrilled to yield to the gentlelady
from Ohio.
Ms. Sutton. Thank you.
Thank you, Mr. Sherman.
Mr. Chairman, this discussion, as I said, has been
extraordinarily enlightening, and I would just like because we
have sort of talked about the complexities, the far-reaching
implications; some of the things that have been explored but
that there are many things that may have not been explored by
way of solutions. And I really just want to ask our Lieutenant
Governor, who we are so grateful to have here today, whether in
light of all this, are there any solutions that we may not have
talked about that you might want to bring forward?
Mr. Fisher. Mr. Chairman, Congresswoman Sutton, I do think
there is one solution that has not been yet discussed today
that is worth putting on the table. I think it is fair to say
that those of us who believe that there are antitrust
implications of this really have two objectives, not one. We
don't stop at our legal objective, because that, frankly, would
not be particularly effective. We are trying to do two things;
we are trying preserve and enhance competition in this market,
and we are trying to preserve and enhance the jobs in southwest
Ohio.
There may be a way to do both, and that would go back to
what DHL originally tried to do several years ago when it tried
to have a single airline serving DHL from their hub. It is
understandable that when DHL cannot own its own airline because
of Federal law and it has to contract with two different
airlines, ABX and ASTAR, that does cause some efficiency
problems for DHL and some cost problems. And DHL, I think, by
its own admission at least at one point in time had come to the
conclusion that the way to solve their financial problems was
to have ASTAR, in which they have a 49 percent interest, to
acquire ABX and thereby having one air carrier to deal with.
So it seems to me that there are two potential solutions
here that only DHL themselves can really speak to, but this is
from my standpoint. The one is to go back to the original kind
of transaction that DHL at one time felt could solve its
problems and explore whether or not a similar such transaction
at this point in time could address, if not all of their
challenges, many of them. Because one of the things that DHL
consistently said to us and others is that they have
substantial overhead costs that UPS and FedEx do not have,
because UPS and FedEx own their own airlines.
The second issue is well above my pay grade, but I throw it
up here anyway and that is re-exploring or re-examining the
whole issue about whether DHL should be able to get some sort
of narrow waiver so that they could own their own airlines and
be able to truly compete with UPS and FedEx. I don't know how
UPS and FedEx would feel about it, but my guess is that they
would oppose it. And if they did, that would be proof that it
would promote competition. So I would suggest that might be one
way to solve this problem. We keep the jobs in Ohio. DHL would
not have one hand tied behind its back, maybe even two hands
because of a Federal law that I don't think they are happy
about, and we could carve out an exception and save 13,000 jobs
and in the process enhance competition in the market for now
and in the future.
Mr. Conyers. You know, we have enjoyed the Lieutenant
Governor so much, I hope you bring back our own colleague from
the House, Governor Strickland.
Mr. Fisher. I think I can arrange that.
Mr. Conyers. I think you can. For our next hearing. So I
want to thank everyone for their participation. I hope that you
will carefully examine the thoughts that have been exchanged,
and we look forward to you, if not being on the panel next
time, that you would follow these hearings as closely and as
much as you have contributed to them today.
Ms. Jackson Lee. Mr. Chairman.
Mr. Chabot. I would ask unanimous consent that the Members
of the Committee have the requisite number of days put in the
record either opening statements or other documents.
Mr. Conyers. Without objection, so ordered.
Ms. Jackson Lee. Mr. Chairman.
Mr. Conyers. The gentlelady from Texas, Sheila Jackson Lee.
Ms. Jackson Lee. Mr. Chairman, I will simply put a very
brief statement on the record. I know you are closing and just
to acknowledge that I just came from chairing a hearing on
transportation security, so I want to emphasize to the
witnesses that I will submit questions for the record, but I do
want to emphasize inasmuch as I have a sizable component of UPS
in my constituency, that the reason for being for this
Committee is they are all committed to oppose anti-competitive
actions. I want these jobs to be kept in Ohio. And if it takes
your solution, Mr. Lieutenant Governor, I will work with you
and your esteemed Members of this Committee, but if it takes a
Department of Justice investigation, I will likewise support
that because we must support jobs, and we must void the
monopolistic, if you will, sense of this particular industry.
And I know DHL wants to work through this as well.
Mr. Chairman, I yield back, put my statement in the record
and my questions. Thank you.
[The prepared statement of Ms. Jackson Lee follows:]
Prepared Statement of the Honorable Sheila Jackson Lee,
a Representative in Congress from the State of Texas
Mr. Chairman, thank you for your leadership in convening today's
very legislative hearing on competition in the package delivery
industry. Welcome to our distinguished panelists.
The purpose of this hearing is to examine the state of competition
in the domestic package delivery industry. The package delivery
industry (the domestic market for the transportation and delivery of
packages, parcels, and certain types of mail) has both an air and
ground transportation component. Virtually all air transportation falls
within the segment of the industry known as ``express delivery,'' in
which 1- or 2-day package delivery is guaranteed.
Since 2000, the package delivery market has become increasingly
concentrated. As a result of the acquisition of Emery Worldwide by UPS
and Airborne Express by DHL, the number of market participants has
dwindled from 6 to 4: FedEx, UPS, U.S. Postal Service (USPS), and DHL.
Currently, USPS outsources ``lift'' (airport to airport air
transportation) for its express delivery service to FedEx, UPS, and
ABX.
Recently, DHL announced plans to enter into a 10-year deal to
outsource all of its lift to UPS. This would result in the critical
component of DHL's most lucrative business segment being controlled by
one of its competitors. In addition, the proposed agreement would
concentrate lift for the express delivery segment of the package
delivery industry into the hands of two companies: FedEx and UPS.
The package delivery industry refers to the domestic market for the
pick-up, transportation, and delivery of packages, parcels, and certain
types of mail. Within the package delivery market are two components:
ground transport and air transport, also known as ``lift.'' A subset of
the package delivery market is the ``express delivery'' market,
encompassing those delivery services requiring lift. Those services
typically include guaranteed next-day and two-day delivery.
Historically, the express delivery market has represented between 60
and 65% of the package delivery market. It should be noted that
although USPS has a virtual monopoly in the mail market, it is also a
competitor in the express delivery market.
By 2000, the domestic package delivery market was divided among six
companies: USPS, FedEx, UPS, Emery Worldwide, DHL, and Airborne
Express. DHL acquired Airborne Express in 2003 and UPS acquired Emery
Worldwide in 2004. After the UPS-Emery Worldwide deal, there were only
four major competitors left: USPS, FedEx, UPS, and DHL.
As of 2007, the domestic package delivery industry earned annual
revenues of $32.8 billion for an average volume of 6.644 million
shipments per day. For 2007, the domestic package delivery market was
divided as follows, by market share and revenue:
FedEx--42.7% ($14.02 billion)
UPS--32.3% ($10.60 billion)
DHL--8.5% ($2.8 billion)
USPS--2.9% ($950 million)
Other--13.5% ($4.45 billion)
The express delivery segment of the market was even more
concentrated in 2007, with FedEx and UPS combined controlling 81
percent and DHL controlling another 15 percent. Between 2003 and 2007,
FedEx's share of the express delivery segment grew by 10.3% and UPS'
share grew by 11.2%, while DHL's traffic fell by almost 27%.
In 2000, the package delivery industry was divided among six
competitors: USPS, FedEx, UPS, DHL, Emery Worldwide, and Airborne
Express.
In 2003, DHL acquired Airborne Express, and with it, ownership of
the Wilmington Air Park, a regional cargo freight hub located in
Wilmington, Ohio. In 2004, DHL announced its intention to invest more
than $300 million in expanding the Wilmington facility. Also that year,
Emery Worldwide's successor company, Menlo Worldwide Forwarding, was
acquired by UPS.
In 2007, Germany's Deutsche Post AG, the owner of DHL, posted a $1
billion loss in DHL's U.S. business, DHL Express. In an interview with
the New York Times, DHL Express' CEO, John Mullen, cited rising fuel
costs and attendant fuel surcharges as factors in depressing the demand
for the more lucrative express delivery service and pushing more volume
to ground delivery. He further speculated that this consumer shift may
be permanent. Deutsche Post AG projected a loss of $1.3 billion in DHL
Express' operations for 2008. However, Deutsche Post continued to
maintain that the U.S. market was a ``vital'' part of DHL's U.S.
operations and that ``pullout [was] not an option.''
On May 28, 2008, Deutsche Post announced a reorganization plan for
DHL Express. As part of the plan, DHL Express would terminate its lift
contracts with ABX and ASTAR and move its air transportation
requirements to competitor UPS for all domestic shipments.
The contract would have a duration of 10 years, at a cost of
approximately $1 billion per annum. Sorting operations for air
transportation would be moved from the Wilmington, OH hub, to UPS'
Louisville, KY hub. In public statements, management for DHL and
Deutsche Post AG anticipated that the overall restructuring plan, of
which outsourcing to UPS is a major component, would result in
approximately $1 billion in annual savings. By some estimates, however,
shuttering the Wilmington facility would eliminate more than 8,000
local jobs.
Although management for DHL hopes to have the agreement in effect
sometime in 2009, there is currently no agreement in place.
It is against this backdrop that we invite today's witnesses to
discuss anticompetitive practice in the package delivery industry. I
look forward to the insightful testimony of the witnesses and welcome
their testimony.
Thank you, Mr. Chairman, I yield the balance of my time.
Mr. Conyers. Thank you very much, Madam. We will also add
the statement of Senator Barack Obama, who has submitted a
statement for the record for this hearing. With that, we close
the hearing and thank everybody very, very deeply for their
attendance.
[The prepared statement of Mr. Obama follows:]
Prepared Statement of the Honorable Barack Obama, a U.S. Senator from
the State of Illinois
[Whereupon, at 5:51 p.m., the Committee was adjourned.]